Estate and Tax-Planning Amalgamation for 2020 Year-End Planning

Advice to the Advisors

2020 Year-End Tax Planning | Sheaff Brock Offers Tips for Advisors

Estate and Tax-Planning Amalgamation for 2020 Year-End Planning

With control of the Senate remaining unclear until after the January runoff election, advisors are finding their clients “erring” on the side of caution, challenged by the need to make year-end tax planning decisions. The possibility of a split government gives hope that the more significant tax increases proposed under Biden’s tax plan will prove difficult to put into effect, Sheaff Brock Vice President Tiffany VanHook observes. Meanwhile, the most practical tax-planning approach, she suggests, is for advisors to put the emphasis on traditional year-end balancing of portfolio capital gains and losses as well as on urging clients to maximize contributions to tax-advantaged savings accounts.

One very specific tax-planning concern involves worry that, under the new administration, changes might be made to the gift and estate tax laws before the scheduled “sunset” time of year-end 2025. While less likely under a split government, VanHook cautions that, should such changes occur, the magnitude of potential loss is great enough to warrant discussion. Clients with the means to implement certain strategies should be urged to consider taking the proverbial estate tax-planning bull by the horns—now.

For Married Filers:
Residents of 19 states, including Indiana, may choose to create a Spousal Lifetime Access Trust (or SLAT) to utilize their remaining lifetime exemption. A type of irrevocable trust, the SLAT is used to transfer wealth outside of an estate, using the federal lifetime gift and estate tax exclusion (now $23.16 million per married couple). With a SLAT, one spouse makes a gift of assets into the trust to benefit the other spouse and possibly other family members, while removing the assets from the estate (yet retaining some access to those assets in times of need). Although the grantor cannot serve as Trustee, he/she may choose to have the trust taxed as a Grantor Trust, meaning he/she may personally pay the income tax associated with the trust.

For Individuals:
DAPTs, or Domestic Asset Protection Trusts, also allowed only in certain states, help single filers maximize their lifetime exemption by transferring assets to an irrevocable trust with a “qualified trustee.” In addition to the tax advantages, assets are protected from creditors’ claims (with the exception of child and marital support obligations). As is true of SLATs, the DAPT grantor may choose to pay individual income taxes on the earnings in the trust. The tax planning purpose? The grantor passes assets to beneficiaries free of estate tax.

Caution Clients: “Don’t Try This at Home”
Whether clients’ estates are larger or smaller than the current estate, gift, and generation-skipping transfer tax (GST), VanHook suggests advisors discuss using some or all of their gift and estate tax exemption before it drops (whether next year or at the scheduled time five years later). Needless to say, for implementation of complex tax-planning arrangements such as SLATs and DAPTs, clients will need to consult estate planning counsel.

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