The Wealth Planning Trifecta: Your Questions Answered

Pam Lucina, President of the Northern Trust Institute
Paul S. Lee, Chief Tax Strategist, Northern Trust

Now is the time to revisit your wealth plan to prepare for an uncertain future.

We find ourselves in a unique environment for wealth planning. The confluence of record low interest rates, high exemption amounts and an uncertain future for tax policy make it an important time to revisit your wealth plan. In our new paper The Wealth Planning Trifecta (available for download via the link below), we answer client questions about how to take advantage of this window of opportunity and prepare your wealth plan for an uncertain future.

Numbered Header List, Heading Number 1

Record Low Rates

Families who intend to transfer significant wealth to future generations should consider employing techniques that are especially effective in this historically low interest rate environment, including grantor retained annuity trusts (GRATs) and intra-family loans.

Questions we answer:

  • Why do low interest rates make tax-driven gifting strategies such as GRATs more compelling? What is on the horizon for these types of techniques? Are they here to stay?

  • How do loans to family members take advantage of historically low interest rates?

Numbered Header List, Heading Number 2

High Exemption Amounts

The Tax Cuts & Jobs Act (TCJA) of 2017 doubled the lifetime gift and estate tax exclusion amount from $5 million to $10 million, adjusted for inflation ($11.58 million for individuals and $23.16 million for married U.S. couples in 2020). These provisions are scheduled to sunset on December 31, 2025. As a result, the federal estate tax exemption amount will be reduced back to $5 million (indexed for inflation) after 2025.

A victory by Democrat candidate Joe Biden could bring additional changes to the estate tax earlier than the planned expiration, as he has previously advocated returning estate taxes to “historical norms.” During the Obama administration, a number of estate and gift tax changes were proposed but not enacted due to the Republican-controlled Congress. These proposals could resurface, including a 45% top marginal estate tax rate and a lowering of the higher exemption of $11.58 million sooner than its planned expiration in 2025, perhaps to as low as $3.5 million.

Questions we answer:

  • What are the estate tax implications of making a gift in 2020 using the full estate tax exemption amount ($11.58 million) and subsequently having the exemption reduced by half or to $3.5 million? Is there a possibility of being taxed retroactively?

  • What are the estate tax implications of not making a gift of the full exemption amount until after it is reduced?

Numbered Header List, Heading Number 3

Uncertain Tax Policy Future

Given the additional tax revenue required to support current deficit spending in light of the global pandemic, it may be prudent to prepare for the possibility of higher taxes in the future. In addition, a possible Biden win and Democrat control of both houses of Congress could mean these changes may come sooner, along with repeal of the basis "step-up". This includes a potential increase in the top rate for long-term capital gains and qualified dividends from 23.8% (20% plus the 3.8% Medicare tax on net investment income) to 43.4% (a proposed income tax rate of 39.6% plus the 3.8% Medicare tax) for taxpayers with incomes above $1 million.

Questions we answer:

  • How would the proposal to eliminate the “step-up” in tax basis at death affect concentrated securities positions and real estate?

  • Given the advantages of “harvesting gains,” especially when tax rates might increase for the coming tax year, is it advisable to sell a stock position at year end, while lower rates are still in effect, and immediately buy back the same position?

  • Why does uncertainty surrounding the election and tax laws make “flexible trusts” advisable? What types of provisions make a trust flexible?

A Window of Opportunity

The Wealth Planning Trifecta

Now is the time to revisit your wealth plan to prepare for an uncertain future.

Your Questions Answered

Wealth Planning Trifecta

Revisit your wealth plan to prepare for an uncertain future.

Multigenerational Families

Perfect Your Plan

Take advantage of this window of opportunity.

Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

Read more articles for multigenerational families

Navigate to Election 2020: Wealth Planning Considerations
Impact

Election 2020: Wealth Planning Considerations

Wealth planning strategies for the Biden Tax Plan.

Navigate to A Stress Test For Your Estate Plan
Family

A Stress Test For Your Estate Plan

Are there surprises lurking in your plan?

Navigate to Election 2020: Plan, Don’t Predict
Wealth

Election 2020: Plan, Don’t Predict

Northern Trust’s wealth planning scenario analysis for all political outcomes.

Navigate to Election 2020: Where the Candidates Stand on Key Issues
Wealth

Election 2020: Where the Candidates Stand on Key Issues

A quick guide to the presidential candidates’ economic and policy positions.

Explore Specialized Advice