A 3-step tax and estate planning checkup for any client

In times of risk and uncertainty, it’s easy for clients to feel overwhelmed about things they can’t control: inflation, market volatility, political headlines, just to name a few. Fortunately, tax and estate planning is one area where your clients can gain some control over their lives and finances.

This three-step checkup can help. It includes a review of the essential plans and documents that are important for any client to have in place, along with wealth management strategies to help different types of investors make tax-aware financial planning decisions while maintaining flexibility at a time of uncertainty.

1. Cover estate planning basics
2. Match wealth transfer opportunities to client types
3. Find ways to reduce income taxes

1. Cover estate planning basics

An annual check-up is a natural time to review the documents a client already has in place, to confirm they are up to date and remain in line with their current wishes. It’s even more important for clients who have experienced major milestones in the past year. Did someone get divorced or married? Maybe the birth of a child or a second marriage has created a blended family? If your client has elderly parents, it’s also a good time to check in with them to see if all planning documents are up to date. 

Documents to check on include:

Advance health care directive. Also known as a “living will,” it allows clients to appoint the individual who will make health care decisions for them in the event they can’t speak for themselves. If they already have one, you may recommend consulting with an attorney to confirm this document still reflects the client’s end-of-life wishes. 

Will/living trust. These documents dictate how assets are disposed of upon death and who manages that process (i.e., the executor or trustee). Even if clients don’t see the need for changes to a will or trust, you may recommend they consult an estate planning attorney about updating generic or “boilerplate” provisions. 

Financial power of attorney. This document designates the person who will handle clients’ financial matters if they are unable to do so. If a client owns assets that are complex (like a business) or located in other states, you may recommend consulting an attorney about the need for additional financial powers of attorney. 

Beneficiary designations for retirement accounts and insurance. Retirement assets and insurance policies are generally distributed according to their designated beneficiaries, not the terms of a client’s will or living trust. Clients should regularly review and update beneficiary information on those accounts. This is particularly important for clients with significant retirement account assets.

2. Match wealth transfer opportunities to client types

Under the lifetime gift exemption, individuals can transfer a certain amount of assets without being impacted by the 40% gift tax. The exemption amount, which under the Tax Cuts and Jobs Act (TCJA) is $13.61 million in 2024, shelters both transfers during life (which would otherwise be subject to the gift tax) and transfers at death (which would otherwise be subject to the 40% estate tax). That means any lifetime gifts made will use up a portion of the exemption amount and decrease the amount available to apply to transfers at death.

However, certain provisions of the TCJA are temporary measures. Unless Congress acts, the exemption amount is scheduled to revert back to the 2017 level — which is $5 million, adjusted for inflation — at the end of 2025. 

As a result of these potential changes, many clients who have not had to think about tax-efficient wealth transfer moves may need to start doing so. Clients who can afford to make a gift may have even more incentive to consider doing it now.

How you approach a gifting strategy conversation with clients depends on their specific circumstances. Here are a few examples that may help you make sense of different strategies and start the discussion with your clients, so they can be prepared when seeking advice from their tax and legal professionals.

The client understands the tax benefits of making a gift, but is reluctant to give up access to the assets:

Because a gift of an asset removes not only the value of that asset from the client’s estate but also the future appreciation, the earlier in time the gift is made, the better it may be for the client (and the beneficiaries of future gifts). 

But some clients, especially those on the younger side, may want the tax benefits of giving away assets, but are also concerned about losing access to the assets (and the future appreciation) for the remainder of their lives. 

For this type of client, encourage a discussion with her estate planning attorney on the types of gifting structures that would allow the client to retain some degree of access to the gifted assets. One example is the spousal lifetime access trust, or SLAT. A SLAT is an irrevocable trust created by one spouse that gives the other spouse the lifetime interest, and the children and/or grandchildren the remainder interest. By creating a SLAT, an individual is able to utilize a lifetime exemption to remove assets and appreciation from her estate, while maintaining indirect access to the assets through the recipient spouse’s beneficial interest.

The client is concerned about a taxable estate upon death, but has a low tolerance for complexity:

Since there could be potential changes to the lifetime exemption amount, a client who wasn’t previously concerned about having a taxable estate upon death may have to now consider the possibility that his or her estate could exceed the lifetime exemption amount. But because the potential changes are not a certainty, clients may not want to go to the trouble or expense of creating trusts and complex gift structures. Instead, these clients may want to discuss simple gifting techniques with an estate planning attorney.

• Annual exclusion gifts: The exclusion amount is $18,000 in 2024 and $19,000 in 2025, which you can gift per person, per year, without eating into your lifetime exemption amount. Making gifts of the annual exclusion amount can be an effective, simple way for a client to move a significant amount of money from the estate on a regular basis. For example, say married clients have three children and seven grandchildren. If each spouse makes an annual exclusion gift to each of their children and grandchildren, they can give a total of $360,000 in 2024 or $380,000 in 2025 in nontaxable gifts. That removes up to $380,000 from the estate, along with any future appreciation or income attributable to those assets. 
• Funding a 529: Because of their high contribution limits (for example, the limit for the CollegeAmerica 529 plan is now $550,000), 529 education savings plans can be a great vehicle for making annual exclusion gifts. Clients can gift up to $18,000 a year ($36,000 if they're married) per beneficiary in 2024. Under a special gift tax election, clients can also make a lump-sum contribution of up to $90,000 ($180,000 if married) and elect to spread the gift evenly over five years with no federal gift tax consequences (assuming no other gifts are made to the same beneficiary during the five-year period). 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. Additionally, clients can fund their 529 plan contributions with gifts that apply against their unused lifetime exemption amount from the estate and gift tax. Or they can use a combination of the two strategies, and fund a portion of their 529 contributions with annual exclusion gifts, with the remainder coming from gifts that apply against their lifetime exemption from the estate and gift tax. Clients should consult with a tax advisor regarding their specific situation.
• Direct payments of tuition and medical expenses: A direct payment of another’s medical or tuition expenses (in any amount) is not a taxable gift, nor does it eat into the client’s annual exclusion amount or lifetime exemption. With the generally high cost of private school and college, this type of gift can be tremendously helpful in lowering a client’s future taxable estate, as well as helping children and grandchildren. 

The client owns an asset that’s expected to substantially appreciate:

Some clients may have assets that are currently depressed or low in value but expected to rebound or appreciate significantly. These clients may want to discuss estate “freeze” techniques with an estate planning attorney. With estate freeze techniques, you are not gifting an entire asset, but rather the future appreciation. These gifting structures are intended to “freeze” the value of the asset in the client’s hands as of the date of the transfer, thereby removing the future appreciation from the estate. While rates are not as low as they were in 2020, it is still a relatively low interest rate environment, and these types of wealth transfer techniques can still be effective for clients.

Some of the more popular freeze techniques include: grantor-retained annuity trusts (GRATs), sales to a defective grantor trust, and intra-family loans. Here’s a brief overview of how each might work.

• GRATs - The grantor in this case is your client, who can transfer assets to an irrevocable trust and retain an annuity stream based on the value of the asset at the time of transfer, plus an assumed rate of appreciation based on the current “7520” rate (which the IRS uses to value charitable interests within trusts and estate planning vehicles). Low interest rates mean less appreciation retained by the grantor. 
• Sale to a defective grantor trust – When a grantor retains the rights to an asset for tax purposes but otherwise removes the value of the asset from the estate, it’s known as a defective grantor trust. In these transactions, the grantor sells an asset to an irrevocable trust in exchange for a note. As the owner of the asset, the trust will be the beneficiary of any future appreciation of the asset. The note is in the amount of the “frozen” value of the asset at time of transfer, plus an assumed rate of interest. This assumed rate of interest is determined based on the current applicable federal rate (AFR), so the lower the interest rate, the more future appreciation is transferred to the trust.  Because the trust is structured as a grantor-type trust for income tax purposes, neither the sale of the asset to the trust, nor the payments of interest on the note, are taxable events.
• Intra-family loans - These are exactly what they sound like: loans between relatives. Intra-family loans offer another way to take advantage of interest rates before they go up any further. Because the interest rates on intra-family loans are determined based on the current AFR, the “cost” of making these loans increases as interest rates rise.

3. Find ways to reduce income taxes

Mitigating taxable gains: Regardless of which party wins the next election, clients are always looking for ways to reduce their tax bills. To help clients mitigate the impact of taxable gains, even when selling appreciated assets as a routine part of the financial plan, here are some techniques to consider:

• Consider tax loss harvesting: Selling stock positions with an unrealized loss can help offset current and future capital gains. A capital loss can offset up to $3,000 of ordinary income and capital gains. Plus, unused losses can be carried forward. If clients don’t have substantial current capital gains but are expecting them in the near future, they might consider recognizing those losses now, especially if the position is expected to rebound. 
• Make charitable contributions: Charitable gifts provide a charitable deduction (subject to certain percentage limitations), and there are ways to time and structure clients' charitable giving to meet both philanthropic goals and mitigate taxes. For example, contributing to a donor-advised fund can offer an immediate tax deduction and allow clients to stretch their giving out over many years. For the 2024 tax year, cash donations to qualified charitable organizations are generally limited to 60% of an individual's adjusted gross income (AGI). This means that if a donor's AGI is $100,000, they can claim a maximum deduction of $60,000 for cash contributions. In 2025, cash donations will be limited to just 50% of an individual's AGI. A client could give $50,000 to a donor-advised fund this year and qualify for a deduction, and use that fund to make contributions to a charity over the next five years. (This is also a great way to get families involved in the wealth planning.)
  
• Fund a charitable lead trust: If the client has both income tax mitigation and tax-efficient wealth transfer within her sights, consider a charitable lead trust (CLT).  With a CLT, the donor transfers an asset to an irrevocable trust, through which a charitable beneficiary receives the “lead” interest in the form of annual payments from the trust. At the end of the trust term, a noncharitable beneficiary (such as the client’s children) receives any remaining assets. If the CLT is structured in a certain way, the client should get a current income tax deduction upon funding, equivalent to the present value of all of the “lead” interest payments over the term of the trust. Additionally, CLTs can serve as tax-efficient wealth transfer vehicles, especially when interest rates are low. Because the valuation of the remainder interest (which is the portion of the trust that is subject to gift tax) is based on the section 7520 rate, low interest rates mean a lower transfer tax cost. It also offers the potential to transfer more appreciation to the client’s noncharitable beneficiaries.

Lowering future tax bills: With the future of tax rates uncertain, clients may be considering ways to structure their assets to keep their future tax bills down. A big focus for these clients may be situating their assets to capture as much tax-deferred growth as possible. Aside from the obvious, like encouraging clients to fully fund retirement accounts to capture tax-deferred growth potential, consider the following:

• Fund tax-deferred vehicles: Clients may want to consider funding 529 accounts. These vehicles provide the benefit of tax-deferred growth potential, which can make a difference in a client’s financial plan over a period of years, especially if the client’s income tax rates increase during that period. 
• Convert traditional IRA to Roth IRA: For anyone who expects income tax rates to increase, converting a regular IRA account into a Roth IRA may be an effective way to mitigate future income tax liability by “locking in” a client’s current tax rate.  Also, if the client expects to pass a portion of retirement assets down to children or grandchildren, a more substantial Roth conversion may make sense in light of the “10-year rule.” Under the SECURE Act, post-death, inherited “stretch” IRAs are now subject to the 10-year rule: For many beneficiaries that inherit in 2020 or later, the entire remaining account must be distributed by the end of the 10th year following the year of inheritance. This new distribution rule may have a significant negative impact on the future tax liabilities of the beneficiaries inheriting a traditional IRA, because required minimum distributions, which are subject to taxes, may need to be taken throughout the 10-year period. And the entire remaining amount would be subject to taxes at the end of the 10-year period. Whereas with a Roth IRA, the beneficiaries can wait until the end of year 10 to liquidate the entire amount, potentially tax free. While the client’s Roth conversion may not solve all of the tax inefficiencies created by the new rule, it may provide some benefit to the family by “prepaying” the taxes (perhaps at a lower rate) that would otherwise be the responsibility of the beneficiaries.
  
• Consider tax-efficient investment products: Investors are more focused than ever on after-tax returns because of the impact taxes have on what they take home. One way to potentially maximize after-tax returns is by incorporating tax-efficient products into your portfolio. For example, both actively and passively managed exchange-traded funds (ETFs) have low investment turnover and are designed to pay out little to no capital gains. Additionally, separately managed accounts (SMAs) can be customized to harvest investment losses to offset gains. 
• Use highly appreciated assets to fund a charitable remainder trust (CRT): A CRT is an irrevocable trust with a “lead” (a unitrust, which is similar to an annuity) interest for a noncharitable beneficiary, and a remainder interest for charity. In a CRT created during the donor’s lifetime, the donor usually retains the lead interest for a period of years or for her lifetime, and then any property remaining in the CRT at the end of the term goes to the designated charitable organization. The CRT itself is not subject to income tax, so it can sell assets without recognizing gain. Any gain realized by the CRT upon the sale of an asset will be recognized by the grantor little by little as she receives annuity or unitrust distributions. By funding a CRT with a highly appreciated asset and then having the CRT sell the asset, the client could potentially minimize a big income tax bill in the year of the sale, as well as potentially capture the deferral power of spreading the gain over the full term of the trust.

Whether you are conducting an annual review or calming a fears of uncertainty, this tax and estate planning check-in can be beneficial to almost any investor. And it’s certain to help highlight the value of your services to clients.