Retirement

Wealthy Families: Consider These Planning Ideas Before ‘The Sunset’

The clock is ticking on the expiration, or sunset, of the 2017 Tax Cuts and Jobs Act, which nearly doubled the lifetime estate and gift tax exemption from its previous levels. For 2024, the exemption stands at $13.61 million per person and $27.22 million for a married couple. However, this is scheduled to revert back to 2017 levels, that may put the exemption amount at around $7.5 million per individual and $14.5 million for a married couple, depending on inflation over the next few years.

For high-net-worth families, there are financial planning strategies to take advantage of today before the rules change. Doing so may save your family quite a bit on taxes. Let’s look at a few of these ideas to consider implementing for your family.

1) Charitable Giving Using Cash: When it comes to giving to charity there are a myriad of creative options to consider. In light of the sunset, it’s worth taking another look at deductions for cash contributions. Under the Tax Cuts and Jobs Act, the deduction for cash contributions directly to charity increased from 50% of AGI to 60%, including for gifts to a donor-advised fund. After the sunset, this limit will revert to 50%, so donors should consider maximizing their cash gifts today.

2) Strategic Gifting: As a result of the continued market volatility and challenging economy, certain assets may be depressed in value. Gifting these depressed assets, whether directly to a beneficiary or in trust, that have temporarily dropped in value, but have the potential for appreciation allows you to move assets out of your estate using less of your lifetime estate and gift tax exemption. This will also you to protect future growth from the eventual increase in asset values outside your taxable estate.

Another point to consider is that regarding assets that were previously transferred to grantor trusts with retained “substitution powers.” These assets should be assessed for opportunities to move low-basis assets out of such trusts at a lower current value in exchange for higher-basis assets of equivalent value. Using a substitution of assets to undo prior planning strategies could allow you to mitigate capital gains on the lower-basis assets that have appreciated inside the trust by returning them to your taxable estate, and thus allowing them to benefit from the step-up in basis at death, with no impact to your remaining available lifetime estate and gift tax exemption and no increase in the size of your taxable estate.

3) Planning for business owners: It’s worth discussing with business owner clients about how to transform net operating losses (NOLs) into tax-free income with a Roth IRA conversion. Business owners who record a net operating loss may be able to use it to their advantage. Unlike net capital losses, where taxpayers are limited to using only $3,000 annually to offset ordinary income, taxpayers can generally apply NOLs against 80% of taxable income. Clients carrying forward large NOLs can use those losses to offset the additional income from a Roth IRA conversion.

Another idea for business owners is that the Tax Cuts and Jobs Act created a new tax deduction known as the qualified business income (QBI) deduction. It permits certain pass-through entities like sole proprietors, partnerships, and S corporation owners, to deduct up to 20% of their business income, subject to certain income thresholds and other limits. This deduction is also scheduled to sunset at the end of 2025. Therefore, accelerating income to obtain the 20% deduction may provide significant tax benefits for business owners who qualify for this exemption.

4) Income tax planning ideas: Income tax brackets are slated to revert to the pre-Tax Cuts and Jobs Act levels after the sunset. This means that the top tax bracket may increase to 39.6% from its current 37%, so the typical strategy of deferring income may not be a smart decision. Not only is the top rate increasing, but the middle tax brackets will expand to capture people who are in a lower bracket today.

5) Alternative Minimum Tax (AMT) Considerations With Incentive Stock Options: AMT is an alternate tax calculation that is computed by removing many of the typical income tax deductions, like state, local, and property taxes and in some cases including additional income such as from the exercise of incentive stock options, so it can result in a higher tax liability.

The Tax Cuts and Jobs Act significantly increased the AMT exemption amount. Meaning it increased the threshold at which a taxpayer is subject to the AMT. However, this exemption amount will return to pre-Tax Cuts and Job Act levels in the event of a sunset, so more taxpayers may be subject to the AMT.

Given this reality, consider exercising your incentive stock options (ISOs). ISOs aren’t considered to be income for regular tax purposes, but it is considered income for AMT purposes. This can result in AMT being due in the year of exercise. For people with ISOs that will be available to exercise pre-2026, it may make sense to take the potential change of exemption into account when developing an exercise strategy.

6) Estate Planning considerations: Given an extremely divided Congress, many of the changes imposed under the Tax Cuts and Jobs Act, especially these all-time high increased exemption amounts, may sunset after December 31, 2025. Therefore, planning needs to be flexible to adapt to any changes in legislation. There is only about two more years to take advantage of certain estate planning opportunities to optimally utilize these increased exemption amounts.

One idea to consider is utilizing a Spousal Limited Access Trust (SLAT). SLATs are irrevocable gifting trusts that move assets and future appreciation outside of one’s taxable estate but include a spouse as a beneficiary so that the grantor has indirect access to the funds in case they are needed in the future.

In order to have SLATs created by spouses for the benefit of the other recognized for gift tax purposes, it is advisable to create them at different times and in different tax years. Therefore, to complete these prior to the sunset at the end of 2025, you would need to start no later than 2024.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. ParkBridge Wealth Management is not affiliated with Kestra IS or Kestra AS. Investor Disclosures: https://www.kestrafinancial.com/disclosures.

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