Help clients prepare for potential tax policy changes

With changes to income and estate taxes likely coming our way after the elections, your clients may be anxious to respond with big wealth planning moves. This is a great opportunity for you to provide tax and estate insights designed to address the “what-ifs” and help clients avoid making rushed decisions they might regret.

“You can’t predict the future, but you can help put what seems chaotic into context and show clients how their wealth plan can be adapted for higher tax scenarios,” said Leslie Geller, wealth strategist at Capital Group.

Helping advisors make sense of how changes in policy could impact planning is the focus of Geller’s new monthly series, “Live with Leslie Geller.”

In this episode, Geller talked with Anne Gifford Ewing, trust and estate specialist at Capital Group Private Client Services, about planning ideas to help clients more confidently navigate the new tax outlook, no matter who wins in November.

The topics discussed are issues financial professionals may want to raise with their clients, and for estate planning or taxation matters, investors should consult with a legal and/or tax advisor regarding their individual circumstances.

1. Tackle estate tax concerns with strategic gifting

The Tax Cuts and Jobs Act (TCJA) expires at the end of 2025 and the loss of one particular provision is getting a lot of attention: the historically high lifetime gift exemption, currently set at $13.61 million per person. “As the deadline nears, clients might be caught up in the drama of this sunset date and come to you anxious to do something quickly,” Ewing said.

Caution clients against making decisions based on speculation. Instead, she suggests, keep clients focused on their goals for the estate. Ask them: What do you want your wealth to achieve? What can you actually afford to give away? The answers could diffuse that deadline pressure.

You can also remind clients of what Geller calls “gateway gifting techniques” that have potential wealth transfer and income tax benefits and are simpler to execute:

Consider paying education and health care expenses for others. Direct payments of tuition and medical expenses, no matter the amount, are not subject to gift taxes and can be a good way to make an immediate impact on the lives of recipients.

Consider making annual exclusion gifts. With the annual gift tax exclusion currently set at $18,000 per person per year in 2024, these gifts can be an efficient way for clients to make gifts on a consistent basis without eating into their lifetime exemption amount. Not only do these gifts remove a significant amount of money from a client’s estate, they also remove any future appreciation or income generated from that gift. (Tax deductions may be disallowed in the event of non-qualified withdrawals.)

Develop a broader gifting strategy around 529 savings accounts. For clients that worry about the restrictions that come with 529 plans, remind them that beginning this year the Setting Every Community Up for Retirement Enhancement Act of 2022 (SECURE 2.0) allows investors to convert 529 savings accounts into Roth individual retirement accounts (IRAs) without taxes or penalties. This could be good news to clients with overfunded 529 savings accounts. And the ability to convert money in a 529 savings account into a Roth IRA also might persuade otherwise reluctant clients to fund them.

“I found that grandparents especially loved the idea. Not only am I funding this to pay for higher education, but I could maybe also give my grandchild a little boost in their retirement savings,” Geller said.

Be aware that there are some restrictions to these rollovers. Penalty-free rollovers can be made if the account has been open for at least 15 years, and the amount to be rolled over has been in the account for at least five years. Rollovers are limited to a maximum of $35,000 per beneficiary over their lifetime. Rollover contributions must also be within Roth IRA annual contribution limits ($7,000 in 2024) and is reduced by any “regular” traditional or Roth IRA contributions made by the beneficiary in that year.

Point out that if clients make annual exclusion gifts to 529 education savings accounts for their children or grandchildren, they can accelerate those gifts by investing five times the annual gift limit in a 529 — up to $90,000 ($180,000 for married couples) at one time — essentially making five years’ worth in one year. Additional gifts made to that beneficiary over the next four years after the year in which the one-time gift is made may reduce the donor’s lifetime gift and estate tax exemption. If the donor of an accelerated gift dies within the five-year period, a portion of the transferred amount will be included in the donor’s estate for tax purposes. Consult with a tax advisor regarding your specific situation.

You should also point out to clients that tax-advantaged treatment for 529 plans applies to savings used for qualified education expenses. These include tuition for an elementary or secondary private or religious school (kindergarten through 12th grade) up to a maximum of $10,000 incurred during the taxable year per beneficiary. State tax treatment varies.

2. Amplify the efficiency of tax-aware giving

For clients who prioritize charitable giving among their legacy goals, you can help them find ways to realize tax benefits. Two tax-savvy moves charitably inclined clients may consider are:

Consolidate contributions to donor advised funds (DAFs). These funds are widely known as a simple, tax-smart investment solution for charitable giving and are increasingly popular — contributions reached an all-time high of $85.53¹ billion in 2022. But keep in mind that grouping or “bunching” several years’ worth of donations in a single year into a DAF can offer substantial tax savings for donors. Clients who are expecting a one-time bump in their taxable income in a single year, for example, from the sale of a business, might find bunching contributions to DAFs particularly compelling.

Leverage charitable remainder trusts (CRTs). These trusts could be a good fit for clients seeking to optimize a gift of illiquid assets with a lot of embedded capital gains. That’s because CRTs can help spread out and redistribute the payment of any capital gains tax over a number of years by beneficiaries who may be in a lower tax bracket. By funding a CRT with a highly appreciated asset, such as a concentrated stock position, and then having the CRT sell the asset, the client can avoid a big income tax bill in the year of the sale.

3. Consider retirement assets outside of the estate

Retirement accounts are not considered part of an individual’s estate and so might not figure as prominently in planning conversations around a client’s will or trust. Still, IRAs can often be a large portion of the wealth that clients bestow to family.

The Setting Every Community Up for Retirement Enhancement Act (SECURE) of 2019 included provisions affecting the taxability of inherited IRAs which could give you a good reason to dive deeper into how clients’ retirement assets factor into their overall estate plan. (These discussions might also help start or deepen relationships with your clients’ children and grandchildren.)

Two notable changes are:

“Stretch IRAs” for many beneficiaries are eliminated. Before the SECURE Act, beneficiaries could use a “stretch” strategy with inherited IRA distributions, potentially allowing for tax-deferred growth over an extended period. Now, many non-spouse beneficiaries who inherited IRAs on or after Jan. 1, 2020, must empty the account within 10 years of the account owner’s death.  

More beneficiaries will be required to take annual distributions. These rules also say that during that 10-year period after inheritance, many recipients of inherited IRAs will now have to take required minimum distributions (RMDs). For example, if the original account owner took RMDs before their death, which is likely in most cases, Ewing said, the non-spouse beneficiary would have to continue taking those distributions. (The RMD amount each year can vary based on the value of the inherited account and the beneficiary’s age and relationship to the deceased, so consulting client’s tax attorney is a good idea.)

When drafting wills or living trusts, consider factoring in tax implications for those inheriting IRAs. “Sometimes the most tax-efficient and supportive move clients can make is naming a charity as the beneficiary of a retirement account and leave family other assets more optimized for taxation,” Ewing said.

As the election nears and campaign rhetoric heats up, help clients resist taking actions driven by fear. Yes, tax rates are scheduled to increase in the short term, but it is unclear if a newly elected government can or would restore the TCJA cuts, enact a modified version or sign an entirely new tax policy into law.

“Encourage them to keep a posture of flexibility, and an openness to what might happen, so they are not rushing into something that doesn’t really feel comfortable” or serve their best interests in the long run, she said.