3 financial planning and tax moves to consider now

Any time of year is a good time to check in on a client's taxes and financial plan. If you have an annual client meeting coming up or are just looking for ideas that might inspire opportunity, this three-step checkup can help. It includes a review of the plans and documents already in place, and an assessment of wealth management and tax mitigation tools to help clients leverage the current economic climate while maintaining flexibility at a time of uncertainty.

1. Go back to planning basics

A good place to start is to engage with clients in reviewing current estate planning documents and ensure they are up to date and in line with their current wishes.  

This review is even more important for clients who have experienced major milestones recently.  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.  

Some important parts of a basic planning tool kit 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. This document also details 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 also a good chance to review how recent retirement legislation may affect clients’ retirement planning.

2. Be aware of wealth transfer opportunities

Under the lifetime gift exemption, individuals can transfer a certain amount of assets without being impacted by gift tax rates up to 40%. The exemption amount, which the Tax Cuts and Jobs Act (TCJA) increased to more than $11 million in 2018, 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 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. 

The exemption amount is indexed for inflation, making it $13.61 million in 2024 and $13.99 million in 2025. But the TCJA is a temporary measure. Unless Congress acts, the exemption amount is scheduled to revert back to the 2017 level — which is $5 million, adjusted for inflation — January 1, 2026.  With a spotlight on the deficit in the 2024 election, there are likely to be new tax proposals coming, which may include proposals that could affect the tax cost of the transfer of wealth during a person’s lifetime, including a significant reduction to the lifetime exemption amount.   

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 client examples that may help you make sense of different strategies and start the discussion with your clients.

For the client who 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 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.

For the client who 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.
  

• Make annual exclusion gifts: Remember, the exclusion amount in 2024 is $18,000 and in 2025 is $19,000, which you can gift per person, per year, without eating into your lifetime exemption amount. Making gifts of the annual exclusion amount can be a very effective, very 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 $380,000  in nontaxable gifts in 2025. That removes the amount from their estate, as well as removes any future appreciation or income attributable to that $380,000.  If the annual exclusion gifts are made to 529 accounts for the client’s children and grandchildren, the client can frontload up to five years’ worth of annual exclusion gifts for each beneficiary.    
• Make 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.  

For the client who has an asset that is 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. Although interest rates have risen from historic lows, they are still in a place where these techniques are worth discussing with an attorney. 

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 section 7520 rate.
• Sale to 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).
  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. The interest rates on intra-family loans are also determined based on the current AFR, which, while not as low as it has been in recent years, is still less than average rates for commercial loans, which makes them attractive.

3. Find ways to mitigate or lower income taxes

Mitigating taxable gains: Clients may be expecting significant taxable gains for 2024, from a strategic sale of a capital asset or from routine sales made as part of a financial plan. To help mitigate the impact of these gains, here are some techniques to consider:

• Recognize losses: Any time of year may be a good time to consider tax loss harvesting — selling stock positions with an unrealized loss to 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 expect 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. 
  Tax loss harvesting offers an opportunity to add efficiency to an investment portfolio, if you replace the investment with one that's higher quality, has a lower expense ratio or is more tax efficient — or a combination of the three. 
  
• Make charitable contributions: Charitable gifts provide a charitable deduction (subject to certain percentage limitations). This could be a relatively easy way to mitigate 2024 income tax liability. 
  Deductions for charitable gifts are generally limited to 60% adjusted gross income (AGI) in 2025 for cash contributions, or up to 30% of AGI for contributions of securities or appreciated assets. You have five years to claim your unused deduction. If the TCJA sunsets, deductions for charitable contributions for cash contributions will be limited to 50% of AGI in 2026 (versus 60% under current law).
  Charitable gifts can also help remove assets from the estate, which may impact the client's estate or wealth transfer plan. 
• Use retirement assets to make qualified charitable distributions (QCDs): QCDs provide one of the most tax-efficient ways for high net worth clients to accomplish their charitable giving goals by allowing them to directly transfer funds from a retirement account to a charitable organization. QCDs count against required minimum distributions and allow retirement funds to be used directly for charitable contributions on a pre-tax basis, which allows individuals to make charitable contributions that are not subject to the limitations of an itemized income tax deduction.
  Individuals can make up to $105,000 of QCDs annually in 2024 and $108,000 in 2025, beginning at age 70 ½.
• 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. 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. 
  As with estate freeze techniques discussed above, although interest rates have increased from historic lows, they may still be worth discussing with an attorney.  

Lowering future tax bills: Clients may be thinking about the potential for tax increases over the next several years and how 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, consider the following:

• Fund tax-deferred vehicles: Clients who are looking to save for the education of their children, grandchildren or other family members may want to consider funding 529 accounts or purchasing insurance. 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.
  Additionally, with the 529-to-Roth IRA rollover provision under SECURE 2.0, up to $35,000 of unused funds held in 529s can be rolled over to a Roth IRA for the beneficiary if the account meets certain requirements.  This new provision gives 529 account owners the option to use excess 529 plan funds to jumpstart the retirement of their beneficiaries.
• Convert traditional IRA to Roth IRA: For anyone who expectsto be in a higher income tax bracket during retirement, converting a traditional 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 on the distributions that will be taxed going from a traditional IRA to a Roth IRA.
  Also, if the client expects to pass a substantial portion of retirement assets down to children or grandchildren, a Roth conversion may make sense in light of the “10-year rule” provision that took effect in 2020, under the SECURE Act. Many inherited “stretch” IRAs are now subject to the "10-year rule" which requires the entire account to 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 the retirement account. While the client’s Roth conversion may not solve all of the tax inefficiencies created by the 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.
• Fund a charitable remainder trust with highly appreciated assets: For clients who are charitably inclined, a charitable remainder trust (CRT) is an irrevocable trust with a “lead” (a unitrust or 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 is avoiding a big income tax bill in the year of the sale, as well as capturing the deferral power of spreading the gain over the full term of the trust.