Key Wealth Matters Podcast: Estate and Tax Planning Strategies in an Election Year

October 2020

[Gary] Welcome everyone to the next episode of our podcast series focused on various wealth issues and opportunities with advice tailored to today's event. My name is Gary Poth and I lead the Family Wealth Business here at Key Bank. And today's topic is focused on election year estate and tax strategies. And joining me for today's discussion are two of our top experts, Lisa Clifford, who's a Family Wealth Strategist for our Northeast region and Jeff Getty who's the Managing Director of our Family Wealth Consulting team. Just a little bit of background on Lisa and Jeff. Lisa is a certified private wealth advisor and she's also a certified merger and acquisition advisor and just a little tidbit on Lisa. She is a monthly television guest on a program called "Money Monday" which is a show out of Albany in New York. Jeff is a nationally recognized author and speaker with over 20 years of experience working with closely held and family owned businesses on innovative asset protection, tax reduction as well as estate planning strategies. Jeff's got a degree, a law degree from the University of Pittsburgh. He's got a Master's of Science in Taxation from Duquesne and he is also a certified merger and acquisition advisor. Jeff was also recently elected as a fellow by the American College of Trust in Estate Counsel, ACTEC in recognition of significant contributions to the field of trust and estate law. So welcome Lisa and Jeff to the program. Before we dive in today's topic, I just wanna mention as a backdrop, that Key Family Wealth is one of the largest and oldest family offices in the country. We serve about 250 families and we manage about $14 billion in assets on their behalf. So with that, let's jump in today's topic. Lisa, I wanna pull you into the conversation first. Maybe just for our listeners, can you describe today's environment when it comes to tax and estate strategies, what's available and more specifically what the potential changes of those strategies could be as we come up on the November elections?

[Lisa] Sure, thanks Gary. We all I think can agree that 2020 has been a year full of uncertainty and you know, this theme continues as we approach the November presidential election. So if we consider a potential change in national leadership, we know that there is a strong likelihood that a democratic win would mean tax reform especially given the massive federal stimulus spending related to the COVID-19 pandemic. We can anticipate that this reform would likely include a reduction in the current estate and gift tax exemption which is right now sitting at about 11.5, 8 million or just over 23 million per couple. The current exemption is scheduled to sunset on January 1st, 2026 and revert to 2016 levels of 5.5 million index for inflation. So a big drop. If we do have a Biden win and Democrats to do gain control of Congress, there is speculation that this exemption may be reduced prior to it. This really presents high net worth individuals with a compelling window of opportunity to take advantage of the current higher exemption amount and take steps to reduce their taxable estate. Guidance that we've seen from the IRS indicates that gifts paid today using the higher exemption amounts prior to a tax law change won't be subject to a future penalty or callback. So we viewed this as a use it or lose it opportunity and are strongly encouraging clients to act now to consider strategies that will allow them to use the current exemption which is at record high level.

[Gary] So Lisa, no matter what happens in the election, even if we do nothing, it's still going to expire in 2026 going down to less than half the level it is now. But as you point out, if a political power changes hands, there's a very good chance it could go down even lower than that much quicker than the 2026. Is that essentially it?

[Lisa] That's right. And really we do see the exemption amount says it does impact a high net worth in our highest level paying taxpayers. It's almost low hanging fruit. So it's certainly something that is very likely to be subject to change.

[Gary] Makes sense. Could you maybe just give a little bit of insight on the tax rate itself? I know, if I believe it's at 40% today. Anything on the radar that might suggest it would go up from here?

[Lisa] Always a possibility. We are at 40% right now. And you know, again, there's, you know we view this whole thing as subject to change but depending on, you know, certainly if we have a Democrat that that takes hold, the likelihood that we could see further changes in the tax rate is definitely present. We do know that Biden's plan does also include a reduction, the elimination of the step-up in basis at death on appreciated assets so that's another thing to consider as we recommend strategies for planning for our clients.

[Gary] Got it. Jeff maybe your thoughts on not just the federal estate tax but I know there's a whole host of other tax strategies that you think the client should be thinking about. Why don't you just lay out a few of those?

[Jeff] Sure Gary. Starting with the federal estate tax issue, the name of the game here is flexibility. Federal estate tax has been around since 1914 in various shapes and forms. There's at least five major revisions to that tax act or that particular tax. And we expect that it, you know, regardless of the outcome of this election, it'll continue to be adjusted and changed over time. So particularly with the advent of utilizing long-term trust to avoid federal estate taxes which has been around for quite some time, we really advocate flexibility for clients. So the best case scenario in a period of uncertainty in a relatively short timeline like we faced with today, we're typically gonna gear ourselves or lender talk to clients about strategies that allow them to give away assets for tax purposes yet indirectly or perhaps even directly retain beneficial ownership in case they ever need that money back. So there's some very specific strategies that have been developed over the past you know, 20, 30 years to accomplish those goals. We use those frequently and talk about them even more frequently now than we have in the past because they allow someone to take advantage of the higher exemption. And if the exemption goes down retroactive back to January one, they're ahead of the game and the election goes the other direction and it doesn't change, they still have access to those assets. They can use the exemption in another way, shape or form later in time. So from an estate tax planning or estate planning perspective, it's flexibility. The other thing I would add in the mix is in most of those circumstances, we're also gonna talk to clients about modestly funding those structures before the election so everything's ready to go and then they can make a game time decision between election day and December 31st as to how much they want to fund. So it's at the second level of quote unquote hedging your bet against the change in tax law.

[Gary] Hey Jeff, I just wanna go back to something you just said, it's really interesting. So there are strategies where clients can get the assets out of their estate but they still retain an interest, a beneficial interest in those assets. Is that what I heard you say?

[Jeff] That's exactly right. One of the best known and widely utilized which is unfortunately only available to married couples is what's known as a spousal lifetime access trust which basically says that I said, I use my exemption to set up a trust for my spouse's benefit and then she uses the dollars in her exemption to set up a trust for my benefit. So they kind of crisscross those assets. They can't be exactly the same. The trust has to be slightly different but in essence, I fund my exemption for my wife's benefit, she funds her exemption for my benefit. So we retain between each other's trust, direct or indirect dominion and control and distribution from the full you know, 20 odd million dollars that are available to both of our exemptions. There's other strategies but that's the one that's probably the most widely utilized.

[Gary] Yeah. So it's the get to have your cake and eat it too strategy. That's a really interesting. And then you also mentioned just kind of putting these structures into place before the end of the year but not fully funding them. Talk, just talk a little bit more about why that is.

[Jeff] Yeah. So, we're dealing with a client right now, Lisa and I, who is not married but would like to utilize the exemption. So it's slightly more vexing set of circumstance, a little more difficult to plan around, clearly sees the benefit, right, particularly long-term. This gentleman's in his early forties so the growth potential of his asset base over his life expectancy and the impact of future estate tax is quite a large number but a little uncertain about taking in essence you know, $11 million of his net worth and dumping into a trust for the benefit of someone else with a mere expectancy perhaps you get the money back at a future date under that particular strategy, she just doesn't wanna fully fund it. So what we suggested to him is look, let's set that particular vehicle up, let's fund it modestly. And I think in that case, we're talking about a thousand dollars, right? He puts that in, so everything's ready to go. And then if the election is a big sweep across the board for the Democrats and it's pretty certain that based on the post election conversations that they're gonna change the federal state tax in a negative way for him, he's got the accounts and everything ready to roll. He can just send in transfer paperwork from account A to account B which is the tax strategy device and fully funded, funded with $5 million whatever. So he gets a, has everything set up but he gets a second chance to look at it before year end and understand how important that is right now. There's only so many estate planning attorneys out there. And what you want to avoid is being in the long list of return phone calls to be returned November 4th because you didn't do anything and now you're scrambling to try to pull something together to take advantage of this higher rate or lower rate for you.

[Gary] Yep, okay. No, that I think that would, it really makes a lot of sense and it's prudent advice. Hey Jeff, just switching gears, I know that there are a couple of other categories that you had some thoughts around when it comes to a tax planning strategy. So you wanna just touch on a couple of those.

[Jeff] Yeah, sure. I'm gonna piggyback a little bit on one of Lisa's comments about the cap gains rate and the loss of step-up in basis. You know, a very vaccine potentially set of circumstances that might be somewhat problematic. It's a little tough to get to clients and say, "Hey, we think you should take advantage" and harvest all your gains today "because tax rates might be higher tomorrow." Certainly wouldn't recommend that but selective gain harvesting probably makes sense. So for assets that someone has already identified and probably had their run, not necessarily a stock market assets let's say but it could be real estate, it could be a bunch of different stuff, maybe is the time to take some of those chips off the table. When we have lower tax rates, conversely a tax loss harvesting. Wouldn't wanna do that this year if we expect that you know, rates are likely to go up next year, those losses will be better harvest in future years. So that ability or that look see, what we're telling clients is look, breakdown a sample tax return with your tax advisor and play around with some numbers and see what the impact is in 2020 versus 2021 making assumptions around tax rates. And that can help you score how important is it to you, what's the overall impact and does it actually make sense to do that. Another category that's kind of interesting to be taking around and I don't think super well-known is in the charitable planning area, just two quick topics. The first one, the CARES Act actually allows for the, I'm sorry, raises limitation for cash contributions to a public charity up to 100% of one's adjusted gross income for gifts given to public charities in 2020. So literally you can reduce all your taxable income this year if you gave enough away to public charity. Again, that's not a circumstance we typically would recommend to someone just to want and we do but if you were considering some gifts over a period of time to charity, willing to accelerate them particularly to offset some additional gains this year maybe selling off some property or some ordinary income, things that have occurred, that have stock options, things like that, maybe it's time to, you know, take a hard look at that CARES Act and see, does this make sense for you to increase the value of that deduction for 2020? The other one and I would say this is not a high priority but since we're talking about charitable deduction and we're talking about taxes and we're talking about city plans. One of the major disadvantages or things that was taken away recently was the ability to do a true stretch IRA and a lot of clients in our experience have a large IRA assets. IRAs are great assets while you're alive, they're terrible assets from a tax efficiency standpoint to pass on to the next generation. So being able to stretch it out over the life expectancy of your children was a very attractive asset, made it a very attractive tax planning strategy. So when people were doing their estate plans, one of the things we recommend they look at is kind of taking the old stretch rules and reinvigorating them through the use of a charitable remainder trust. So instead of leaving the IRA directly to, you know, children, we would have it instead go to a charity remainder trust for the benefit of the children and in that way, the charity remainder trust slows down the tax impact over life expectancy of that child. A little bit technical but if someone's already pulling out the estate plan to consider some of these other issues, that's one of the things we would have in our checklist platform to say, hey, if you fit this particular criteria, it doesn't make sense.

[Gary] So in other words, you're using charitable vehicles even if you're not charitably inclined but there's still some advantages to these vehicles that allow you to stretch or defer taxes. Is that right?

[Jeff] Yeah. Given that's in a nutshell, I mean at the end of the day you know, we deal with a lot of clients with varying degrees of not a value judgment on my, on our behalf but it's just the way it is. First and foremost, I would tell anyone in my experience of doing this for over 20 years, most clients would prefer to have assets. They can't have the asset in for themselves or for their kids so there's gonna be a tax impact. Somebody's gonna have to, some of that value is gonna have to go somewhere else. They would much prefer it go to charity of their choice than the federal tax coffers. So from that level of analysis if I can show you a strategy whereby you replace the taxing authority with the charity of your choice, most clients would say, that's a good outcome not the perfect outcome, but it's a good one. The benefit, the other piece of this, that's kind of interesting is that because you can divert for the taxes that over a longer period of time, you could argue or depending how you run the math, it's actually much more tax advantageous for the next generation. So even if you didn't care about whether or not the federal government got their tax parity, you would get actually more money than the next generation. So no matter how you slice and dice it, I think there's a good value in considering strategies like that even if you don't necessarily have large charitable income.

[Gary] Right, right. Hey, Lisa, just coming back to you. You work with a lot of very large complex families and as you know, we spent the last 10 minutes or so talking about there's some good opportunities right now in front of us, some of which are likely to change over the next few months. What advice would you have for these families that might wanna explore, take advantage of some of these strategies?

[Lisa] I would say right now we are definitely proactively talking to all of our clients about using their lifetime gift exemption and you know, just understanding, kind of going back it always comes back to the goals and objectives of the family and making sure it aligns with their financial plan. If their goal is to transfer wealth to their children or to put, they are charitably inclined, you know, this is an opportunity to take advantage of some of these strategies. So it's very, it's a very personalized approach. And I would even say even beyond the largest families that we work with, if you think about reverting back to the 2017 levels of, you know, five and a half or 5.5 million index for inflation, a lot more individuals this will impact and will be subject to estate planning. So I would argue that planning is needed for a much broader set of individuals and couples. And I just think that also, if you consider the low interest rate environment that we're in and perhaps press values in real estate they may own or there or a closely held business, it makes the, some of these strategies even more powerful from a transfer point of view. So I would say like, you know, Jeff echoed, we would certainly advise clients not to wait until the election to begin their planning because, you know, there's going to be a lot of pinup work for many of the estate planning attorneys and this is only gonna continue to grow as we march forward. So actively discussing these opportunities with our clients and really providing resources. You know, we have our upcoming webinar on this topic and it kind of does a deeper dive into some of the strategies that Jeff mentioned but it really just emphasizes the unique window of opportunity that exists right now, reduce the tax burden on their children and grandchildren and really pass well to future generations.

[Gary] Yeah, yeah. I'm glad you mentioned the upcoming WebEx. So just for our listeners, we will be hosting a WebEx here over the next 30 days or so just to give people a chance to interact and ask some questions around the particular strategies. And then Lisa if we've got listeners that wanna get started on this early, I assume they just reach out to you or to some member of their Key Family Wealth team?

[Lisa] Absolutely. You know, we're all here, we're taking questions from clients and non-clients alike and, you know we're willing to, we've got great resources available on this topic and happy to have a conversation with our clients and individuals as well as you know joining in calls with their advisors to kind of talk through some of these strategies.

[Gary] Right. Well, thank you Jeff and Lisa for joining us today and for sharing your insights and expertise. And I'm gonna close the podcast by thanking you our client for trusting Key to help you grow your business and trusting Key Family Wealth to serve as your personal advisor on all aspects wealth management. Jeff, Lisa, myself, we all know that you've got many different choices when it comes to banking and wealth management and I can assure you that this team is always thinking about how to better serve you and to better serve your family. So with that, we'll conclude this podcast and I wanna wish you and your families a happy and safe fall season.

It’s undeniable that 2020 has been a year of unprecedented surprises, and this year’s election promises to present even more uncertainty given the stakes. With such polarized policies from both candidates, a win in either direction could profoundly impact wealth management planning in 2021 and beyond.

In this episode of Key Wealth Matters, Gary is joined by Jeffrey T. Getty, Director of Family Wealth Consulting, and Family Wealth Strategist Lisa Clifford to tackle precisely what you need to know about estate and tax planning in the wake of the 2020 election. Listen to this discussion around how to stay flexible regardless of the election outcome and how to position yourself for various financial opportunities.

Don’t miss your chance to take steps and prepare, as our experts:

  • Account for the impact or changes a Trump or Biden administration would propose related to tax and estate policy.
  • Review strategies to leverage the existing tax exemption laws to lower taxable estate costs.
  • Factor for charitable vehicles as a tax mitigation strategy within a wealth plan.
  • Outline practical steps families can take to get started on their preparations.