Year-End Financial and Tax Planning Tips for Individuals and Couples

Sheaff Brock Investment Advisors | Tax Planning for 2021

Year-End Financial and Tax Planning Tips for Individuals and Couples

Investors maintain caution after the election as control of the Senate remains unclear until after the January runoff election, Sheaff Brock Vice President Tiffany VanHook observes. While this uncertainty makes tax planning more challenging, the possibility of a split government gives hope that the more significant tax increases proposed under Biden’s tax plan will be more difficult to put into effect. The most practical tax-planning approach, VanHook suggests, is to put the emphasis on traditional year-end balancing of portfolio capital gains and losses as well as maximizing contributions to tax-advantaged savings accounts.

One 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 acceleration in changes to the law might be less likely under a split government, should that happen, VanHook cautions, the magnitude of potential loss is such that investors with the means to do so should 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.

Do Not Try This at Home
Whether your estate is larger or smaller than the current estate, gift, and generation-skipping transfer tax (GST), VanHook suggests it is worth considering using some or all of the exemption before it drops (whether next year or at the scheduled time five years later). However, SLATs and DAPTs are complex tax-planning arrangements; investors should seek the advice of estate planning counsel.

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