Four financial planning opportunities to take advantage of in 2020

By Robert A. Westley, CPA/PFS

Editor: Theodore J. Sarenski, CPA/PFS

High-net-worth individual taxpayers must navigate today's environment of rapidly changing tax laws, significant gift and estate tax exclusions, low interest rates, low marginal income tax rates, and volatile financial markets. Furthermore, the economic effects of the COVID-19 pandemic and the political uncertainty of the 2020 U.S. presidential election amplify the necessity for high-net-worth individuals to plan for their wealth in a thoughtful and opportune manner. 

The tax-efficient accumulation, preservation, drawdown, and transfer of wealth are critical components of a sound wealth plan. Given the overlapping nature of tax laws and wealth planning, tax professionals, through tax-compliance engagements, have a unique understanding of their clients' overall financial situation and ought to be at the forefront of the personal financial planning process.

Many tax professionals who have focused on ensuring a smooth and timely tax-compliance process may have overlooked planning opportunities along the way. Tax advisers can add value to their compliance engagements by taking stock of the financial landscape and offering strategic and tactical planning advice to their clients. 

This column illustrates four timely financial planning strategies that tax professionals ought to contemplate for their high-net-worth individual tax clients.

Lifetime gifting

Current transfer tax landscape

The law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, doubled the federal estate, gift, and generation-skipping transfer (GST) tax exemptions to $10,000,000 (indexed for inflation) per person beginning Jan. 1, 2018. The increased basic exclusion amounts are scheduled to sunset effective Jan. 1, 2026, reverting to the prior exemption of $5,000,000 (indexed for inflation) per person. Moreover, depending upon the outcome of this year's election, the increased basic exclusion amounts could decline sooner. In either case, this could pose a use-it-or-lose-it scenario for high-net-worth individual taxpayers.

Anti-clawback regulations

On Nov. 22, 2019, the IRS, in T.D. 9884, finalized regulations confirming that the benefit of the temporarily increased gift and estate tax basic exclusion amount will not be clawed back for taxpayers who die after 2025. Therefore, if a client gifts the full $10,000,000 exclusion amount and dies after the basic exclusion amount reverts to a lower amount, the incremental gifted exclusion will not be clawed back into the client's taxable estate. As a result, individuals who currently take advantage of the increased gift and estate tax exclusion amounts will not be unfavorably affected after Dec. 31, 2025, or sooner if there is a change in legislation.

Since the benefit of the increased exclusion amount is a use-it-or-lose-it proposition, it is important to encourage clients to consider planning now. 

To lock in the benefit, clients must either make taxable transfers sheltered by the TCJA's increased exclusion amount or die before the increased exclusion amount reverts. Since dying is not optimal, assist your clients in evaluating gifting strategies.

In assessing the appropriateness of making sizable lifetime gifts, first, help your clients calculate whether they can manage to irrevocably part with their assets. Leverage conversations with clients and knowledge of their tax returns to estimate the amount of financial capital needed to sustain their required lifestyles for their lifetimes and quantify the amount of excess capital they can afford to give away.

Spousal lifetime access trusts

The wealth-transfer planning paradigm varies considerably by each client's set of facts and circumstances. A spousal limited access trust (SLAT) might be an alluring option for married couples who wish to take advantage of the increased exclusion amount but also need the financial security of having a certain degree of access to the assets in the future.

A SLAT is a type of irrevocable trust created by one spouse for the benefit of the other spouse. The donor spouse uses his or her lifetime gift tax exclusion to make a gift of separate property to a trust for the benefit of his or her spouse. The donor spouse irrevocably parts with the assets transferred to the trust, while the beneficiary spouse maintains some access to those assets. Assuming the GST exemption is applied to the transfer, following the beneficiary spouse's death, the assets can pass in further trust for children, grandchildren, and more remote descendants.

Properly drafted SLATs shelter the gifted assets and future appreciation from the estate and gift tax, allow clients to retain a limited degree of control over the assets, and protect the assets from creditors. 

Gift-splitting considerations

Tax professionals must note that under the anti-clawback regulations, the "lock-in" nature of gifting the increased basic exclusion amount does not start until the prior exclusion amount ($5 million indexed for inflation) has been fully used. In other words, clients cannot choose to use the increase first and use the prior exclusion amount later. It is an especially important fact to keep in mind when advising clients who have not previously made taxable gifts and clients who are not gifting the entire exclusion amount.

For example, assume a couple have not made any prior taxable gifts, and one spouse makes an $11,580,000 taxable gift in 2020. The donor spouse will have effectively locked in his or her increased exclusion amount, as long as the spouses do not elect gift splitting on their gift tax return.

If the couple elect gift splitting, then each spouse will be deemed to have made a gift of $5,790,000. The smaller split gift amounts will use up each spouse's prior exclusion amount but will not make use of any part of the incremental increase in the exclusion. Gift splitting, in this scenario, will result in the couple's losing the benefit of the increased basic exclusion amount if they survive the Dec. 31, 2025, sunset of the increase.

Annual exclusion gifts

Annual exclusion gifts are also a use-it-or-lose-it proposition. Individual taxpayers looking to reduce their exposure to the estate tax can give up to $15,000, or $30,000 for U.S. married couples, to an unlimited number of beneficiaries per year without decreasing their gift and estate tax exclusion amount or paying a gift tax. 

It is essential to prompt clients to complete these gifts as early in the year as possible, to transfer a few additional months of potential appreciation to their beneficiaries. Also, encourage clients to make gifts to children in trust to protect the assets from creditors, divorcing spouses, and inclusion in the child's taxable estate.

Clients saving for their children's or grandchildren's education should consider contributing their annual exclusion gift to a 529 plan. A 529 plan is a tax-advantaged investment account where contributions grow tax-deferred and distributions are income-tax-free to the extent used for qualified education expenses of the designated beneficiary. The funding of the account can be accelerated by contributing five years' worth of annual exclusion gifts per recipient to a 529 plan. However, be sure to advise clients that within the five-year period, additional gifts to the beneficiary will constitute a taxable transfer using their lifetime gift tax exclusion.

Strategies for taking advantage of low interest rates and depressed asset values 

The confluence of historically low interest rates and volatile financial markets produces unique opportunities in wealth planning. Given the volatility in the capital markets, inquire whether clients have depressed assets on their balance sheets with the expectation of an eventual rebound. 

Gifting temporarily depressed assets or leveraging one of the following techniques may help to shift all the rebound appreciation out of the client's taxable estate and to his or her beneficiaries free of transfer taxes.

The following sections highlight strategies that merit further consideration for high-net-worth individual tax clients.

Grantor retained annuity trust

A grantor retained annuity trust (GRAT) is an advantageous wealth-transfer technique when a client has an asset that is anticipated to increase significantly in value in a short time. The donor transfers assets to an irrevocable trust and retains the right to receive an annuity for a term of years. When the term of years expires, any assets remaining in the trust pass to the chosen remainder beneficiaries either outright or held in further trust for their benefit.

Generally, a transfer with a retained interest to a family member counts as a gift of the full amount transferred without being reduced for the value of the retained interest. However, Sec. 2702(b) describes a qualified interest as an annuity or unitrust interest, and this interest qualifies for the subtraction method in valuing the gift. For example, if a client transfers $1,000,000 to a GRAT and retains an annuity with a value of $999,999, then the taxable gift is $1.

The interest rate assumption built into the IRS table to value the annuity stream uses the Sec. 7520 rate. The Sec. 7520 rate was 1.2% in April 2020 and changes monthly. If the assets in the GRAT outperform the 1.2% IRS hurdle rate, then the excess return will pass to the remainder beneficiaries free of any gift or estate tax. 

The convergence of low interest rates and volatile asset values makes GRATs an attractive option for clients looking to enhance the transfer of assets to their heirs.

Intra-family loans

Another worthwhile planning strategy in a low-interest-rate environment is the use of intra-family loans. The technique involves lending money or selling assets in exchange for a promissory note to a trust for the benefit of family members in lower generational levels. The strategy, like a GRAT, is a freeze technique that locks in the value of the note in the grantor's estate at the original loan amount or purchase price. All the appreciation occurring in the trust above the applicable federal interest rate being charged on the note is removed from the grantor's estate and transferred to the trust free of any transfer taxes.

The receptacle trust should be drafted as a grantor trust so that all items of income are taxed to the grantor. Grantor trust status amplifies the effectiveness of the technique, as income taxes will not diminish the trust. In addition, the grantor will not recognize any taxable income as a result of the sale or loan, and the payment of interest on the note will also be disregarded for income tax purposes. 

Monitor swap powers and review assets

Volatility in the financial markets creates an opportunity to help clients review the cost basis and value of assets already located in irrevocable trusts. If the trust provides the grantor the power of substitution, it may be beneficial to swap low-cost-basis assets from an irrevocable trust back to the individual grantor. The low-tax-cost assets remaining in the grantor's taxable estate at death will receive a step-up in income tax basis under Sec. 1014. It is also advantageous to swap assets with temporarily depressed values from the individual grantor to an irrevocable trust. The benefit is to shift the ensuing rally in asset value out of the client's taxable estate and into the trust.

Charitable lead annuity trust

Clients with a charitable inclination may want to consider employing a charitable lead annuity trust (CLAT) in the current low-interest-rate environment. The technique can prove to be a very tax-efficient way to accomplish both charitable and family wealth-transfer goals. 

A CLAT is a split-interest trust that functions like a GRAT and can be created during life or at death. The donor transfers assets to a trust and designates a charity to receive an annuity stream for a term of years. When the term of years expires, any assets remaining in the trust pass to the noncharitable remainder beneficiaries either outright or held in further trust for their benefit.

An advantage of funding a CLAT during life is the capability to lock in a low interest rate, which results in passing more wealth to heirs. As with a GRAT, the IRS table used to value the charitable annuity is based on the Sec. 7520 rate. Therefore, if assets in the CLAT outperform the IRS presumed rate of return, the excess appreciation will pass to the noncharitable remainder beneficiaries free of any gift or estate tax.

Charitable planning

Many high-net-worth individual taxpayers are charitably inclined and endeavor to optimize their charitable giving. Clients may be concerned by the doubling of the standard deduction and suspension of many itemized deductions under the TCJA. The result is that far fewer taxpayers are itemizing their deductions and therefore deriving an income tax benefit from charitable giving. It is vital to consult clients on how to tax-optimize their charitable giving. (Note that under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, taxpayers who do not itemize their deductions are allowed an above-the-line charitable deduction of up to $300 for cash contributions to qualifying charities in 2020.)

Bunching donations

Individual taxpayer clients who regularly make charitable gifts may find it advantageous to bunch a few years' worth of contributions into a single tax year. Bunching several years of charitable donations into one year, rather than contributing smaller amounts each year, may help individuals exceed the standard deduction hurdle, thereby receiving a more significant tax benefit for their charitable giving.

Donor-advised funds

A charitable contribution can be made to a donor-advised fund. The individual donor will receive the income tax deduction in the year of the gift, and funds can be distributed to various charities over time in subsequent years. This will also avoid disrupting how the charities are accustomed to receiving their cash inflows from donors.

To leverage the most benefit out of a larger charitable contribution, it is optimal to fund the donor-advised fund with long-term, low-cost-basis securities. The individual donor will receive a charitable income tax deduction for the full fair market value of the stock and will not have to recognize any built-in capital gains.

Qualified charitable distributions

An individual retirement account (IRA) owner who has reached age 70½ may direct the distribution of up to $100,000 per year from the IRA to one or more qualified charitable organizations. This distribution to a qualified charity is not taxable to the client.

The distribution counts toward the client's required minimum distribution (RMD), which is also beneficial to the client. However, a client's RMD is not an issue for 2020 because the CARES Act, waives all RMDs for 2020. It is important to note for years after 2020 that under the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (Division O of P.L. 116-94), the required beginning date for RMDs is moved to the calendar year in which the owner reaches age 72, up from 70½ formerly. 

Rather than qualifying for a charitable income tax deduction, the distribution is entirely excluded from the account owner's income. It is crucial to discuss the benefits of qualified charitable distributions with clients since it is a way to gain an effective charitable tax deduction without itemizing deductions.

Designating charitable beneficiaries

For clients with taxable estates, pretax retirement accounts are an excellent option for satisfying charitable bequests. Retirement accounts represent income in respect of a decedent (IRD). IRD can be taxed twice — once when included in the decedent's taxable estate and again for income tax purposes when the beneficiary receives distributions.

The SECURE Act has rendered the income taxes owed by beneficiaries more onerous by accelerating distributions from their life expectancy to a 10-year payout for most nonspouse beneficiaries. As a result, it may be efficacious to designate a charitable beneficiary, thereby receiving both income and estate tax charitable deductions. When an exempt charity is named as the beneficiary of the retirement account, the charity will receive the full asset value without owing income taxes.

Roth planning

The TCJA lowered marginal tax rates and expanded the income tax brackets. A lower-income-tax-rate environment is generally favorable for Roth-type accounts, which receive after-tax contributions. It is a valuable exercise for a tax adviser to examine opportunities that incorporate Roth-style accounts into a client's overall wealth planning.

Roth 401(k) maximization

An increasing number of employers are offering employees a Roth 401(k) option. Roth 401(k)s are generally under-used, particularly among high-income earners. Since Roth 401(k)s have the same contribution limits as traditional 401(k)s, a taxpayer can achieve a higher effective savings rate with the Roth option as compared with a traditional 401(k).

The traditional 401(k) contribution produces an income tax deduction, and the resulting tax benefit can be invested. However, once the maximum contribution limit is reached, the tax benefit must be invested in a taxable account. A taxable account, by definition, will have a slower growth rate due to the ongoing tax drag. On the other hand, 100% of the Roth contribution remains in the Roth 401(k) growing tax-free for the benefit of the taxpayer. Therefore, a taxpayer who makes the maximum contribution may still come out ahead with the Roth 401(k) option, even with a tax rate at distribution lower than at contribution, as the overall portfolio has greater tax efficiency. 

Roth conversions

Roth conversions may be more attractive for high-net-worth clients since the TCJA lowered marginal income tax rates. Taxpayers who anticipate being subject to higher tax rates may want to contemplate partial Roth conversions that lock in lower tax rates on some of their pretax retirement savings. Executing a Roth conversion during times of market volatility when asset values are depressed can reduce the tax cost associated with the conversion.

Help clients to plan for any Roth conversions carefully because, under the TCJA, a recharacterization or redo is no longer available. Roth conversions will now result in having to pay the income tax on the original amount even if the value of the account decreases or the tax burden is more substantial than initially expected. 

The trusted adviser

Individual high-net-worth taxpayers, now more than ever, are seeking a trusted adviser to help them navigate these dynamically changing and challenging times. Tax advisers are well equipped to venture beyond their tax-compliance engagements and provide consultative advice to clients seeking thoughtful guidance. Personal financial planning advice is an excellent chance for tax professionals to stand out as trusted advisers and consultants rather than merely as tax preparers.



Robert A. Westley, CPA/PFS, is a wealth adviser at Northern Trust in New York City. He specializes in the financial management and wealth planning needs of high-net-worth individuals and their families. Mr. Westley is a member of the National CPA Financial Literacy Commission and a former member of the AICPA Personal Financial Specialist Credential Committee.Theodore J. Sarenski, CPA/PFS, is president and CEO of Blue Ocean Strategic Capital LLC in Syracuse, N.Y. Mr. Sarenski is chairman of the AICPA Advanced Personal Financial Planning Conference. He is also a past chairman of the AICPA Personal Financial Planning Executive Committee and a former member of the Tax Literacy Commission. For more information about this column, contact


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