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RETIREMENT PLAN INVESTOR

Use your plan ID (available on your account statement) to determine which employer-sponsored retirement plan website to use:

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  Insights

Taxes
The election is over, but the uncertainty persists: 2021 year-end planning

This time last year, the world was awaiting the outcome of the U.S. election. Among the predictions: higher taxes if Joe Biden became president. Although congressional inaction to date has stymied any increases, the federal government faces significant pressure to raise revenue for infrastructure and the various pandemic-related stimulus programs enacted in 2020 and 2021.


As we headed into the fourth quarter, Democrats in the U.S. House of Representatives proposed sweeping tax changes that could profoundly alter the planning options available to wealthy Americans. Regardless of how the proposed legislation might be revised — or whether it passes at all — it’s worth putting careful thought into potential year-end planning moves and pursuing strategies that will make sense for your individual situation.


Start with gift-giving basics before considering specific planned gifts.


For many clients, relatively small cash gifts and charitable distributions cover much of their annual gifting, with no analysis of proposed tax reform required. These strategies are almost always the simplest place to start:

  • Make “annual exclusion” gifts. The annual exclusion (in 2021, $15,000 from an individual or $30,000 from a married couple) is the maximum amount you can give to an individual in a year before it counts against your lifetime exemption amount. You can make annual exclusion gifts to as many different people as you like, or to trusts for their benefit.
  • Pay any medical or tuition bills on behalf of loved ones. When paid directly to the provider, gifts of these kinds do not count against your lifetime exemption amount.
  • Consider “front-loading” 529 education savings plans. You can put up to five years’ worth of annual exclusion gifts into a 529 account — currently up to $75,000 for an individual or $150,000 for a couple (per beneficiary).
  • Consider year-end charitable giving options. Outright gifts of cash to public charities made in 2021 are exempt from the usual adjusted gross income (AGI) limits due to an extension of a provision in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. You can also make qualified charitable distributions of up to $100,000 directly to public charities from a traditional retirement account; such a donation takes the place of a taxable required minimum distribution.

Potential changes to income and capital gains taxes could guide your decisions.


Traditional planning advice is to defer income and capital gains for as long as possible and to accelerate any deductions (typically, charitable gifts) into the current tax year. However, proposed tax changes would increase both income and capital gains rates. Here are some strategies to consider in such an eventuality:

  • If you have assets in a traditional IRA account, consider converting to a Roth IRA in 2021. The income tax due on the conversion will be assessed at current income tax rates, and the assets remaining in the Roth IRA can then grow income tax free, subject to proposed new Roth IRA caps. Remember, assets in a Roth IRA can be accessed by your heirs after your death without income tax consequences.
  • Consider deferring gifts to charity to a future tax year, when tax rates may be higher.
  • Though the proposed capital gains rate increases would be retroactive, you may want to consider diversifying concentrated single-stock positions or other illiquid assets with a built-in capital gain.

The lifetime exemption for estate and gift tax is historically high and may decrease soon.


Under current law, the lifetime exemption amount (now $11.7 million per individual) is scheduled to be cut in half in 2026, to $5 million indexed for inflation (approximately $6 million). The proposed reforms would begin in 2022.


Let’s say you want to make a larger gift to your loved ones and you’ve worked with your Private Wealth Advisor and tax and legal professionals to assess your income tax planning options and financial capacity. Consider whether it makes sense for you to take advantage of the historically high lifetime exemption amount. Such larger gifts can be made outright to loved ones or could fund advantageous grantor trust vehicles, which may soon be unavailable.


Treasury regulations finalized in 2019 provide that gifts made using the lifetime exemption amount that was in place in the year of the gift cannot be “clawed back” later if the exemption amount is decreased. This guidance also makes clear that the exemption is a use-it-or-lose-it proposition: If you gift $5 million in 2021 under the $11.7 million total and the exemption later decreases to $5 million, you have no remaining exemption.


Other strategies take advantage of low interest rates.


Interest rates have remained low in 2021. That provides high net worth individuals with additional wealth transfer strategies that don’t eat into their lifetime exemption. Some clients have used the opportunity to make fixed low-interest loans to loved ones to cover the cost of a home, start an investment program or build a business.


Other clients are avoiding using their lifetime exemption by transferring appreciation on an asset using a grantor-retained annuity trust, or GRAT; this strategy is more effective in a low-rate environment. Some clients are selling a large asset to a grantor trust for a promissory note fixed at a low interest rate — a strategy that could be eliminated under the proposed reforms.


Charitable planning opportunities


Gifts of noncash assets to donor-advised funds, or DAFs, are generally deductible at the asset’s fair market value upon the date of the gift, so they are another option for clients worried about paying higher capital gains taxes on a future sale of assets. Many clients are also considering split-interest trusts (charitable lead and remainder trusts) because of the possibility of moving assets out of their taxable estate and retaining some benefit for themselves or their loved ones.


Your Private Wealth Advisor can discuss the pros and cons of each of these strategies, and your Capital Group Private Client Services team can model different scenarios and evaluate the financial impact on your situation. You should also consult your tax and legal advisors before engaging in any tax or estate planning strategy, as this material does not constitute legal or tax advice.



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Taxes
Regulation & Legislation
Fall 2021 Quarterly Insights

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