Unlocking Opportunity Series: The Top Financial Moves to Stay Ahead of 2021 Tax Proposals

Good afternoon. Thank you for joining us today I'm Lisa Clifford. I am the wealth strategists at Key Family Wealth and I'm pleased to present our next topic in our 2021, Unlocking Opportunity Series for Business Owners. The top financial moves to stay ahead of the 2021 tax proposals. Joining me for today's discussion is Jeff Getty, Managing Director of our Family Wealth Consulting Practice and Francis Brown Senior Director. In addition to their legal expertise Francis and Jeff also have their masters in tax among multiple other designations and are uniquely qualified to lead today's discussion. As senior leaders in our business advisory services consulting practice, Jeff and Francis and their team are committed to serving as owner advocates to provide unbiased advice and education well in advance of any planned transition or transaction. Keys business advisory services team has 8.5 billion worth of cumulative transaction experience in providing advice to help owners avoid predictable mistakes and suboptimal business transition outcomes. Their goal is to provide owners with an understanding of the risks that threatened their personal financial and business goals and share step strategies to mitigate those risks. So, we look forward to sharing some timely actionable information with you today. For those of you who would like to submit a question just hover over the presentation screen click the bubble dock on the bottom with the three dots the question answers will show up. Please type it into and select all panelists and select send we'll answer as many questions as we can in the final few minutes of our discussion today. So our agenda today is gonna cover a broad give a broad overview of the current administration's proposed agenda and the implications on income and wealth transfer tax planning. So Jeff and Francis let's start today's program with an overview of the Biden administration's current thinking.

Thanks, Lisa. So, this is Francis Brown. Welcome to everyone. Pleasure to be presenting to you. Today, we're gonna start off with the overview of the Biden administration tax agenda, really gonna be hitting on some common threads, numerous presentations are out there. So we're gonna spend a little bit of time just going through it to be able to set the table to say what's happening in case you haven't heard. But the bulk of the presentations are gonna be on more planning ideas and strategies, as well as action items. So, president Biden campaigned on tax reform and has got a weight out of the gate put through a $1.9 trillion COVID proposal, got it passed. Some people think it's too big. Some people think it's too small. The American rescue plan passed without any bipartisan support. So you could say went through the budget reconciliation process. The big question coming up is will he be able to get another one through? Incidentally, I'd heard of stat that the previous nine bills passed with strong bipartisan support which actually is kind of a first for tax. So the key will be, can he get another one through? So we're gonna start out talking about the federal income tax relief for businesses and individuals was able to extend and modify the employee retention tax credit as part of the cares Act, was able to extend and modify refundable tax credits for COVID or related to paid sick and family leave for certain employees under the Families First Act. Was able to align the treatment of proceeds from the economic injury discovery loans and restaurant revitalization grants, with proceeds on the paycheck protection program. Was able to shop financially struggling multi-employer pension plans, as well as single employer plans. From a federal income tax revenue raising effort i.e tax increases. I mentioned the budget reconciliation process, but some of the provisions that I think we're gonna be spending time talking about here, raising the top rate from 30 to 39.6 for filers with income over 400,000. They're gonna cap itemized deductions at 28%. Is gonna restore the appease limitations for filers with income in excess of 400,000 and raise cap gain rates from 20 to 40%. Including we're gonna be talking about phase out, section 199A deductions for pass through income filers with incomes over 400,000. I'm just gonna change the current interest rules taxing them in ordinary income rates instead of cap gain rates. They were to repeal the stepped up basis at depth and that'll have a huge impact, we'll talk more about that later. Talked about repealing the 1031 exchange, which is obviously a tax deferral strategy and eliminating a per bounce above 500,000 K. I've also talked about expanding the social security payroll taxes to apply to wages in excess of 400,000 in essence, creating somewhat we'll call a donut hole for filers over 142,000 up to 400,000. Jeff you want to talk about federal and the state gift tax proposals?

Sure, so the federal state and gift tax proposals that we're looking at pretty closely and there are some differences between the Biden administration and like the Bernie Sanders plan, but what we're hearing and what we're seeing in some of those proposals are a lower lifetime or death exemption amount. There's also some interplay we'll get into a little bit later about the 2017 tax Act impact, if nothing happens in that category. So, that's super important to keep in the back of your mind we'll cover in some more detail, Higher transfer tax rates, historically we look at the federal state tax which has been instituted, gotten rid of and come back four times in the history of its being hovers usually around a 50% rate, right now it's less than that. So, we anticipate that to go up. There's been a fair amount of conversation about eliminating certain freezer discounting techniques, things like FEMA partnerships, short-term Gratz. That proposal was originally brought up in the Clinton administration and is coming back to some extent. And there's some significant talk about capping, gifting and annual exclusions and just completely eliminating certain types of other types of transfer tax techniques, we'll talk about in a few minutes. Before we get into some of the details and action steps. I think it's super important to keep in mind and understand the legislative and political process. So legislative process, for those of you who are old enough to remember it there was a great cartoon series on when I was a kid called, Schoolhouse Rock. Where they would go through and talk about how a bill becomes a law and other things like that. That gives the nice clean overview of how the legislative process works. It's actually a little messier than that as you all might've imagine, and it's kind of important to understand what's going on up to this point and what we anticipate to see in the future. So first and foremost, the timing and the order of the proposals that have been sent in thus far. It's no surprise that the what I would consider the most aggressive one, that's been put out thus far from Senator Sanders would be the first one out of the box. And after people got over the shock and all sort of the things that were in there the administration set out their proposed which was less aggressive. So, we would anticipate that as the horse trading starts the series of proposals that come out back and forth will be positioned very carefully to have the take it through a process. The most effective way for the particular party that's proposing it. We do expect the green book to be released in the next four weeks. That'll provide some clarity from the administration's proposal. And then in the background everybody has to keep him on as the role of the CBO and the budget reconciliation process. I don't wanna make this a civics lesson, but understand the CBO show is to kind of sit there in the background as a referee overlooking the concept of balancing the revenue and cost structure of any sort of proposal goes out there. And the reconciliation process is kind of a backstop to all this that provides a basic kind of balance of how this can get pushed through the Senate in particular. So just understand those things sit out there they kind of play a little bit traffic cop, with the horse trading and the political things that go on. Timing and likely to passage. This is really looking into the crystal ball but just real briefly at this point in the year it's kind of tough to see a circumstance where any sort of tax law proposal change, dealing with rates. In particular would be effective either to January one of this year or at the point of passage this year. So we believe that if there is a rate change which we anticipate, it will be effective January one of 2022, not 2021. And there is some discussion, a little caveat out there that capital gains could be impacted as of the date of passage. That's possible income tax rates less a state tax, I think it's the same issue, if there is something that's done. Although I do feel fairly comfortable saying that if there were any particular strategies completely shut down or eliminated, it could happen at the timeframe. We would anticipate an actual Bill from the hand of committee or to a vote on the house of Senate floor. which is kind of a mixed up way of saying at the end of the day we anticipate there might be some level of impact or urgency to get certain things done, before September. Which sends to be kind of that September, October time from which when something might happen. So we don't believe and we'll talk about this several times it's okay to wait at this point on most things we're gonna talk about. There are a few things that probably can wait a little bit for some clarity, but the action item and this is what we're gonna hit throughout this, is you really need to start analyzing your situation doing some modeling, some cashflow planning under different scenarios. Because for the most part a lot of these proposals are just different levels of taxation rate. And you should figure out as you're going through this, where's your pain point. And what I mean by that is if you wouldn't do something at a 20% capital gains rate, let's say, but you would at 25, you should, if you don't know your pain point number, you should start doing some modeling and figuring out what it is. So with that, I'm gonna pass the ball so to speak back to Francis and talk some detail about income tax planning, in particular moves that you should be thinking about making with regard to income tax planning right now today.

Okay. Thanks Jeff. So at the top ordinary income rate, going from 37 to 39.6 obviously a big sense of trying to plan for that and what can you do? So one of the things would be don't wait until the end of third, fourth quarter to start your income tax planning. Start it now and try and plan out those events. So one of the ideas would be to accelerate your ordinary income into 2021, when you're gonna have the opportunity to pay it at a lower rate, as opposed to next year. So, one thing that I wanna make sure to mention is with the 199A deduction somewhat of a use it or lose it. So qualified business income deduction potentially be lost particularly if you're making more than $400,000. So, your effective rate could potentially be about 30% until you go from 30% up to 39.6, because of that deduction. If you weren't able to use the 199A you may already be at the high 37% rate. So it's just a two percentage point increase, as opposed to if you're able to use that, you've been using that deduction, you're gonna take a significant hit. Other thing would be to do review bonus depreciation, any depreciation that you may be taking as a business owner, if you have the opportunity to say, well do I wanna take that depreciation this year, when I'm at a lower rate, or do I wanna go say to a straight line depreciation to wanna make a purchase and depreciated over successive years when the rate would be higher. And the benefit of that depreciation deduction would be higher. Other option would be to defer expenses to 2022. So again, if for entities we the taxpayer do you have the ability to control when you're going to incur those expenses. Do some modeling to figure out what would be the benefit of going ahead and making that purchase this year or doing it next year. Continuing on, we're seeing an uptick in purchase of large ticket items we've had in the private bank. We've had numerous clients purchase airplanes. And again, this could be a matter of what do. If there's a benefit of having that, or is it benefit of waiting to incur that purchase next year. Get a better benefit if you don't spread the depreciation using various depreciation schedules. Significant tax planning consideration for injured individuals need to choose appropriate year for enhancing the tax benefits of charitable giving. So, this is an area where as a donor, you have the ability to control how much you donate, when to donate and where you wanna donate. So the plan of consideration is to think about what's the effective rate of the income is your charitable contribution offsetting? So, if you're at a 28% bracket versus a higher bracket thinking about the size of that contribution to generate that charitable deduction can make a significant impact. But you wanna analyze that so that you would know you could donate a certain amount to fill up or reduce you from one bracket to the next. So, as rates go up the charitable deduction, the contribution to be more valuable, if rates get higher. the Pease Limitations look like they're gonna be phased out or coming back in, I should say. And your itemized deduction cap might be impacted if contribution rates change. So, consider accelerating charitable giving to provide a potential benefit. If you're in that 39.6 bracket you may be capped at the 28%. So, again, you're gonna need to figure that out and do a little bit of modeling. For taxpayers in years 21 not so much 2022 but individuals can make an election on their income to offset a hundred percent of their adjusted gross income their ATI with qualifying cash charitable contributions to public charities. So, keep that in mind. That's something that you'll have through the end of this year. Jeff do you wanna talk about long-term capital gains?

Sure. Thanks Francis. So, when we're talking about long-term capital gains and qualified dividend rate changes the first thing we got to kind of start with is dissect this and talk about tax versus non tax issues. There is always a pain point when one would make a decision most likely based on pure tax rate but that's kind of unusual. Most people will, if they look at this closely bear in mind that just because it makes sense from a tax perspective would do something. It doesn't necessarily make sense to do it from a personal or financial planning decision-making metrics. So, if you have a security you're holding that continues to appreciate or has some other valid reason for having that holding, it doesn't necessarily make sense to sell just for tax planning purposes. Having said that I'm gonna cover very briefly a couple of things we're advising clients on right now. And then I wanna talk a little bit about businesses because business owners are faced with some unique, interesting challenges. One, to the extent it makes sense accelerating sales of long-term capital gain property in the 2021 versus deferring it out to 2022 and beyond makes sense from a tax perspective. So, if you're gonna take a game probably makes sense to start looking at taking it now or this year. Differing losses, losses are gonna be worth more next year than they are this year. So to the extent you can defer them that makes more economic sense. Similar tax harvesting thought processes, right? Triggering gains on stock sales to get the lower 20% rate makes sense. Capital loss harvesting put off until next year. Again, same type of issue. Investment management, highly concentrated stock positions are highly appreciated assets. This one's kind of got some interesting unique factors to it, right? So historically when we've dealt with clients who had highly concentrated positions with large gains, particularly if they were older we would talk about balancing the interest of selling that holding to holding it. And when they pass on, there was a step up basis. And this is an area where this tax law is gonna intersect a little bit. If we get rid of the, if there's opposed to carry basis rule where there's no step up at one's passing, this thought process of selling versus holding gets a little more complicated a little stickier to analyze. So that's one that's kind of challenging to think of a buy and hold strategy for concert position. So, I would definitely have my eye on that pretty closely. Switching for a few minutes on businesses, business owners who are thinking about who are already in the process of a sale process probably makes sense to pursue it heavily and try to get it done this year. I wouldn't say someone should start a sales process this year, if they weren't already predisposed to doing so. But if the thought was, hey I was going to do something this year versus next year this year starts to look a lot more attractive. There is another interplay here going on. That's important to keep in mind that really has very little to do or nothing to do with taxes. Which is the alignment of the the threads of what's driving the sellers market today. So, right now we're in a sellers market and that's based on a number of factors. The most important arguably of being our overall expansive economy. Interest rates are historically low, so, it's cheap to do deals, particularly leverage deals. There's a lot of money or dry powder on the sidelines both in other businesses think strategic buyers or financial buyers, private equity, right? There's money out there that you can leverage their money, it's cheap. There's a lot of activity in this space, if we look into the crystal ball and this isn't that much to look at some point those markets already turn it. We will eventually end up in a neutral or a buyer's market. And if you are trying to time this right now you're kind of at, or close to the peak of the sellers market in our opinion. Certainly people could argue that point, but here's what's not really arguable at some point that'll turn. And it's very difficult to time that change. So as one is thinking about, does this make sense for me to do something today because it's so as market because there're all those other factors line up. You add on the tax benefit or the perceived benefit, if rates go up, it becomes much more attractive. Now I started this thread by saying, I wouldn't recommend driving a process to sell based on just taxes. We've covered some of the other factors we're looking at. So, if you weren't already predisposed to moving forward on the sale perhaps a nice middle ground would be to do some dividend recap or some other sort of partial liquidity event. Take some of the chips off the table of the uptick in growth in your business. Get some diversification and you're kind of hedging your bet a little bit against the other factors changing which will drive down valuation or make your business more difficult to sell. So again, that wouldn't be a factor I look at just in a vacuum but there are certain moves and thought processes. You know, a couple of the things that one of the things that pops in our head a lot we get asked this a lot with particularly, changing and corporate entities and things like that. S-corp shareholders paying themselves, 400,000 salaries could reduce their salaries to avoid the new Social Security tax and take the balance as dividend distributions. Again, assuming this, that particular passage or that Act was fortunately that would pass. You gotta be careful with the Irish saying you're not paying yourself reasonable compensation. There's a lot of little nuance issues that will come out of this tax law change. And it's super important. As these become clear, as this starts to evolve or become more meaningful, more impactful. Do you start looking at the moves necessary to either avoid the worst of those changes or to take advantage of other things that you might not be thinking of previously under the current tax situation? So, a couple of other action items, again rigorous place scenario planning, right? You're gonna have to figure out where does this pain point hit at? What point does paying taxes earlier makes sense versus not? Impact of rate versus loss and step up. Does it make sense for me to sell the asset pay the tax that make up the growth? When should I prepay taxes? There's no absolute right answer. It's really a matter of understanding and quantifying the size of the problem for your individual circumstances. Just generally, I will say with what I'll call generally the transactional space whether it's selling an appreciated stock holding or selling a business interest. The concept of tax planning pre and post sale, pre or post transaction is gonna become super important. We've been in the zone for quite a few years where tax planning is kind of taken I won't say a backseat, but maybe a sidecar to overall strategy, particularly business strategy. If rates go up, which we anticipate them to do tax planning becomes more important. So having someone who knows a lot about this who can do modeling or different sorts of sales, scenarios, allocations, re-racking of interest, things like that, through various trust vehicles, things like that, it's gonna be super important to go forward basis. Plenty of opportunity right now at this point in the year to start some of that. In anticipation of what we expect to see, do you ready to pull the trigger when the time is when we get clarity. Whether that's September, October, November, August whenever it is or even stuff that's gonna carry forward to next year.

Do you have an add on there? Just to reiterate again, don't wait to start your planning your income tax planning until the third or fourth quarter. Start it now, plan out, when you want to potentially, how can you arrange the dots in your favor, so that you can get a more favorable outcome than you would have otherwise.

Right, makes total sense. So, do you wanna talk about a little bit of wealth transfer planning before we get to some Q and A.

Yeah, why don't you go ahead.

So, from our point from our vantage point about wealth transfer planning, again it's not that different than the other things we've talked about. Again, it's the analysis versus implementation, getting ready to plan. For those of you who are paying fairly close attention. One of the things that was interesting was the Biden administration did not talk about changing the lifetime or the death exemption amount. So, you could still transfer the 11.7 million per person whether that's gonna be in or out of the final proposal or thing that gets passed. We don't know. But you've got to really start thinking about how much of an issue would that be for me or not be for me. With the backdrop if with that isn't changed and it's left alone. It is still scheduled to revert back to 2016 law in 2026. So, if the current administration doesn't change that proposal, they don't change how much of the federal state tax exemptions available or the rates it's gonna revert back to something less attractive than today in 2026. Super important because when you think about large federal estate tax issues or federal gift tax issues. This has been up and down over the years, and we're going to, at some point whether it's next year or in five years we're gonna revert back to something a little more onerous.

slide.

If you look at this slide you can see the historical context just over the past, since 2009, where things are projected to go under this estimate section on the far right. And where they've been previously, remember back in 2010 there was a 0% tax rate. There's just so many different moving parts as how this goes. And the important thing to keep in mind from my perspective is when we talk about gifting and using significant gifting to avoid these changes that are coming down the pipe, there's some flexibility that you can build on that which I'll get to in just a second. But starting off. Action steps. Look at how big of an issue is this for you? Do you even have an issue? Is the federal state tax really a problem? How large of a problem is it? Is the problem big enough to do something about? we tell clients all the time. If you have an issue that has to be dealt with in the tax arena, if it's a dollar in tax and you got to spend even $10 to fix it, it's not worth it, right? Like you wouldn't spend 10 to get a $1 benefit. If you spend a dollar to get a million dollar benefit it makes sense. So really understanding and putting some metrics around what is the ramification to you and your stakeholders of not doing something. Specific strategies to implement. A couple of things that I still think make a lot of sense, gifting, debt forgiveness, intentionally defective grant, or trust. So utilized for future sales strategies, and for those of you who are interested in utilizing the lifetime exemption and 11 seven today with either the expectation that it will drop in 2022 or 2026, but would like to retain an interest. One of the best strategies out there is something called, a Spousal Lifetime Access Trust or SLAT. which allows you to give it away for tax purposes. But assuming you are married and you can expect to remain married, you would still have beneficial use and enjoyment through your spouses that don't do draws assets out. So it's kind of a get your cake and eat it to hedge your bets, whatever you wanna call. But it's the ability to take advantage of current tax law very favorable tax law, without necessarily imposing or hurting your ability to access those assets significantly. We've mentioned this a couple of times but I'm gonna bring it up again. Some things that are up on the chopping block. We have these strategies that might disappear. So you should know what those strategies are whether or not they make sense for you to implement. And if they do, and this affects you, you should look at implementing them sooner rather than later. Francis, anything else I missed, you wanna cover here before we get to Q and A?

Yeah. Just to explain this a little bit for further. So, the obviously 2021 on the chart here is this year and the exemption is 11.7 and we just played it out to show people what would happen as a default if the law isn't changed by president Biden. If nothing gets passed here in the short term, that it will default back to really that's six rounded up. So, it continually goes up to about 12.2 and then we'll drop to about 5.5 inflation adjusted. So, there's somewhat of a financial cliff there. And whether you think that the fact that president Biden hadn't including in his proposals is telling, but don't rest on your laurels thinking that you're good for the next 10 years. We know if nothing happens, no other laws get passed back in DC, that the exemption will drop. So, to the extent that you can move a dollar out of your state, not only do you move the dollar but all the appreciation associated with that dollar. So, now is the time to act and by acting I wanna be clear, there's analyzing a situation versus implementing. And so that's really the action item there. Other considerations to how do you hedge your bets. Jeff talked about that a little bit. The strategies you can employ, so that if you wanna do something, how do you do that? There are ways to go about doing that. So, don't think that they're, we say irrevocable and a lot of people think, well, I can never undo anything. Well, there are ways to include provisions so that you can somewhat undo a strategy if you want. Donor's remorse somewhat the same thing. The worst case is that you implement a strategy. You don't have an exit plan or don't have a backdoor and you're stuck with a strategy that you don't want. There are back doors to those strategies so that we can help you. But you have to think about those ahead of time. So, grant or trust, I don't wanna get too technical here. But there are ways to include provisions in trust that you can create that would allow you to get reimbursed. There's turning off different types of bells and whistles so to speak, floating spouse provisions, that's one of my favorite. Expanded trust protector or decamping provisions within trusts so that you can move them. And again, changing what you may consider irrevocable putting in provisions so that you can undo those. And another strategy using qualified disclaimer. So you make a gift to a trust and you have it such that those assets would ultimately come back to you. If laws don't turn out the way that we think they might. So again, we're just talking about backdoors. Don't wanna get too technical. It's really a matter of sitting down with a team of qualified advisors who can help you look at your situation and come up with some ideas thinking outside the box of this might work, this might work, let's think ahead of the game. So considerations for additional considerations, 21 changes to lifetime exemptions. We talk about the clift, we don't know what's gonna happen. Jeff mentioned some of the techniques that were on the chopping block I won't say in the green book and proposals than in prior green books. There's really four ways to manage the estate tax problem. And I talked about it. You can give an asset away, you can discount it, you can freeze it or you can replace that cost with life insurance. And so it's a matter of picking between those different strategies to say what's gonna be the right combination. So, as an action item, called two calls this morning with different advisors who are absolutely tapped out and don't have time to take on new clients appraisers, business appraisers are tapped out. Don't have time to take on new clients. I think that might lessen up because of the lack of a Biden's proposal, including the state tax provisions. So now if you still have time would be the chance to get in and analyze your situation and employ those advisers before it's too late. Jeff do you have anything you wanted to add there in terms of other action items?

No, I don't think so. We purposely left a fair amount of time on this call to handle a lot of Q and A. So I think at this point, why don't we go ahead and see if there's any questions out there Lisa that we can start addressing?

Yeah, we got quite a few in here. One was what's the potential impact of the loss and step up in basis?

Yeah I'll start off with that. My thread on that. So to me, this is a big issue and I think it's been underplayed in a lot of ways. This is passed by a lot of people and first and foremost I would say that what's interesting to me about this philosophy is I think it changes particularly if we look at that in the context of not changing the federal estate tax exemption, the impact to the number of taxpayers is significantly larger than the loss of step up in basis. That issue impacts a large segment or a fairly large segment of our society whether it's inheriting stock positions from older generations or homes, anything like that. This transference of, hey I'll just wait until someone passes on I get a step up and I can sell that asset for no tax cost is huge. Versus the federal state tax which only impacts a relatively small number of people. So I find it somewhat fascinating first and foremost that from his tax policy perspective, we're taking some that generally impacts a relatively small number of people and removing that burden and pushing on a much larger group of people. Beyond that, just real quick, right? I've hit some of this throughout the presentation but it changes the dynamic of gifting, pretty significantly. A lot of times this interplay of does it make sense to give particularly if I have to pay gift tax or if I use up all my lifetime exemption I'm gifting beyond the annual exclusion what is the impact of giving up that basis scenario? It changes everything. It makes it very easy to do a gifting strategy. And quite frankly, from just a quick aside the business space, the concept of, perhaps transferring businesses or using certain types of strategies that transfer businesses changes things dramatically. So the idea that I have to sell or want to sell an asset or a business something like that can change rather dramatically because of the step up, this loss and step up issue. So it closes some doors opens other ones up but I think is something that really needs to be analyzed very deeply in almost any scenario of people with significant net worth particularly they have highly appreciated assets if they don't, it's kind of a non-issue to be quite Frank. If you've done poor choices in your investment management or your business management. Okay, fair enough. It probably doesn't mean that much but in the run-up in the markets we've seen or in some of these businesses that we've seen it's big and it deserves a lot of attention and analysis.

And the next question said, it appears Biden is very clear in his plan to increase the tax burden on those with 400,000 or more. Are you seeing more clients taking proactive steps in their tax planning?

Yeah. I'll take that one. It's yes, so the short answer is yes. We have the question is what are they actually gonna end up doing? So I think the bulk of clients, for every 10 that we have who want to do analyze their situation I'd say 60 percentage or actually implementing some strategies. And the other 40% are happy to have completed the analysis so that they can be comfortable knowing, okay, well I have a problem, I know the size of the problem but it's not a problem big enough that I want to do anything about. And so back to Jeff's example, why spend $10 to fix a $1 or a problem that's less than $10. Short answer, yes. I'm seeing a huge uptick in the number of people want to analyze your situation. But about 60% are actually doing something.

I'll just add to that, I think that this issue is likely to become, or this approach or quants being where this is gonna become more acute and more of a problem issue as the year goes on. So Francis mentioned earlier he knows a couple of advisors already are saying I can't take any new clients that is going to become more acute as a year goes on in my opinion. We certainly saw it last year and I'll share a quick story. We were suggesting a particular tax strategy end of last year for some of our clients and the cost to implement this particular strategy is usually around $5,000 to draft a particular type of document. And we had one client who waited until I think the first week of December last year to do it. And we went to their attorney to have them implement that to draft up the strategy. And the premium was double. It was $10,000 to do the same thing, they would have paid $5,000 for. I think it's gonna be more significant this year. 'Cause at least last year was a little bit up in the air what was gonna happen if we know in, let's say September this is the new tax law there's gonna be this mad scramble. And we think it's well worth people's time and effort to engage your advisors get them start to run some possible scenarios today. The universe isn't that large of what's out there hopefully made that a little bit clear at the beginning of this, here's kind of the common threads and the things we think that need to be addressed or shouldn't be addressed start the analysis today now so that when we get clarity around what's actually going to be in place, it's fairly easy to say, that was option B2 boom. I know exactly what I wanna do. That's the type of spot you wanna be in going into the end of summer into early fall, sorry.

Last thing I'll chime in there with I think the 60% I'd say half are concerned about ordinary income tax issues and the other half concerned about cap gain. And I'd say a combination from those two groups who are concerned about the potential change and the drop in the lifetime exemption amount. So high net worth individuals, those business people consulting on multiple fronts.

I've got a comment here saying I'm not ready or interested in transacting my business this year. What are possible strategies for business owners with pass through entities?

Wow, how much time do we have? There's a lot here. So let me just give a very high level answer and then I'll give a specific thing I hit before in the interest of time. Possible strategies. Any time there's a major tax law change coming to place. It happened in 17, it happened all the prior ones I've been doing this work since the early 1990s. And anytime there's a change, there's opportunity. There's doors that opens a door that close. The key is really taking a hard look at what you're doing today. And how does that overlay with what things are looking like tomorrow, or if the law has passed that particular day. So from a business owner strategy perspective I would say absolutely without hesitation when the dust settles if you're not gonna transact, that's fine. Like we watch clients we know, weren't transacting this year just because of a tax law change. 'Cause it doesn't fit in with our overall goals and objectives, they're gonna have to dust off what they're doing and take a hard look at where they can take some advantage or reduce some impact. One quick example I'll give around that is for a long time as long as I've been around in this business, C corporations were kind of sort of passe, not a hundred percent, but for the most part, most people were in the past through entity treatment, 2017 Act comes around all of a sudden C corps look a lot more attractive and they did. And we had a lot of clients analyze whether or not it would make sense to convert to a C from an asset let's say. It didn't see a lot of movement there. When they went through analysis, there were some benefits perhaps, but I didn't see a lot of that being done, but people went through the analysis. I think inversely, if we see what we anticipate to see. I know the question was about pass overs, but to the extent someone has a C corporation in their world, the conversion to an asset is gonna become more apparent and more interesting. The last golden nugget I will give again going back to the thread of, hey money's cheap, overall interest rates are low an action step, plus for diversification. All these other factors that can want inside the business under space, some sort of dividend recap, or taking chips off the table this year and paying a little bit of tax or if you have a big AAA account, for example but no tax impact makes a ton of sense. I'm not saying everybody should do it. We would never say anything applies equally across the board. But that's one, if I were a business owner right now and thinking about, wow, I'm just not really doing anything now, but I might do three, four years. That's something I would sit down with somebody who knows how those work and go through it and run the math out and say, wow this does or does not make sense.

Hey, Lisa, I don't know if this question was just to me or to the group here, but it's somewhat related to the pass through entity and it says, can you go over the change in the 199A QBI deduction and potential effective date. So Jeff do you wanna chime in on that one or you are I'll start it off and you can add on there. So the change in the 199A QBI deduction if you have qualified business income, and you fall within the range, you get it. Basically your marginal effective rate goes down with the change that's potentially gonna happen here. If you're over 400,000 you're gonna lose the benefit of that. And so your effective rate is actually gonna go up. And that's where I was trying to make the comment that you may be at 30% today. Whereas without the QBI, without the 199A deduction, you would potentially be at a 37%. But with that detection, you're a lot lower. If you lose the benefit that with the, excuse it isn't easy for me to say the Pease Limitations it's just gonna wash out and you're gonna lose the effect of that deduction. The effective date is the second part of that question. That's a really good question. Let me polish off my crystal ball and see if I can figure that one out. I would imagine this is just pure guess on my part to the extent that that gets passed. I would imagine that it's gonna be effective January next year, as opposed to try and have it effective date sometime in 2021. With cap gain rates I guess there was some commentators were thinking that you could pass a wall impacting cap gain rates this year. And it's based on when you had a transaction as opposed to when you earned ordinary income. Again, this is a bunch of nerds throwing darts at the dark or trying to guess and figure it out. So I don't know how to answer that effective date question. Jeff you have anything you wanna add to that question or add to that answer?

No, I think that's good. I mean, there's a few other questions floating out there. I'd like to try to hit as many of those as possible.

Okay sure.

asked, can you talk more about the changes to the gift tax exemption, limiting it to the a million and the loss of estate planning strategy?

So, yeah, there's a couple of proposals sitting out there that are kind of important to keep in mind, let's start off with the gift tax issues. One is limiting gifts to $1 million which would have a significant impact for those clients that are interested in utilizing the 11 seven exemption during their lifetime. So Francis mentioned this, if I give away 11 seven today not only do I get the 11 seven amount of my estate but anything it grows for the remainder of my lifetime is also moved from my estate, this proposal, this thought processes, we're okay with people being able to transfer 11 seven when they pass away, but we don't want them doing it today and getting what I personally hope is at least 30 more years left here. So that one can be highly problematic for some of the clients we know that do significant gifting. If you couple that issue with things like the elimination of short-term or Walton grants or discounting through partnerships and things like that that becomes an even more burdensome position to take or a burdensome issue to deal with. The other part of that proposal, that's kind of sitting out there is limiting or significant curtailing the use of the annual exclusion. Right now, as most of you are aware you can give away $15,000 a year completely tax free without using your lifetime exemption to anyone you choose. I say that a little bit with air quotes 'cause that's within reason. They're talking about limiting the number of lifetimes exemption so you can use in any particular year. Why is that important? Well, it's important because in a lot of cases particularly with business owners, we see as part of a long-term strategy to transfer ownership of the business, to the next generation or generations they use the lifetime exemption on a leveraged basis. They discount the value of the closely held asset and then give it away to their kids and their spouses over an extended period of time. So they avoid a lot of the complex sale and transfer tax methodologies. We have to use with businesses to get significant assets through and things like that. It becomes if they limited that, that would have a significant impact on the ability to utilize those strategies. So when you in a vacuum, some of these limitations issues don't seem all that significant when you start stacking them on top of each other, they become more and more complex and more and more impactful and more and more problematic for a lot of our clients. So again, it's one of those things they look at Francis said at numerous times, "What's the level of impact? How much has this attack hurt me? How much does this impact me? And if it's significant, it's time to pull out the pen to paper or pencil to paper and start figuring out what your options are and how you can deal with it."

I think I can chime in there a little bit so, if you're not ready to sell your business but you want to be able to utilize that exemption. I think we've used the term, use it or lose it. And I'm not sure that we actually described what that would that means. So to the extent what that cliff and the chart we had if the exemption continues to rise to 12.2 and you don't use any of that exemption and then it drops to six, you've effectively lost 6 million of exemption that you could have otherwise moved out of your estate. But let's say you give away a full 11 seven this year and then you die next year and have what a quote unquote premature death. You've been able to get out the full 11.7 regardless of whatever may happen to the laws. So again, if you don't use it then it's gone and you're only left with what you have available in the year that you die which if it's in 2026, it's around 6 million. So this is a perfect year to be gifting assets. Particularly if you've got a business you wanna transfer it to a family and then potentially sell it down the road. Why not go ahead and gift it to an era of trust today that the impacts on valuations from COVID created a lot of uncertainty, depresses values. You've got valuation discounts. We, they exist today. They may not exist in the future. What they've done. One of the proposals that was out there was combining. So if you're gonna give an asset to a trust that's gonna benefit your family. You're unable to get a valuation discount. So again, we don't know what's gonna happen this year. The likelihood of these things passing again, Jeff I don't remember if you mentioned this or not but it's go with the most aggressive strategy first shooting for a compromise. Do we know if that's what's happening? This is a perfect year if you've got a business, maybe move some of it outside of your gross taxable estate you still have the ability to sell it. I use the term with control versus effective control. You may not have total control but you'll have effective control and have the ability to still influence what happens.

So I know we're running close on time but this question came to me. It looks directly. So I'm gonna bring it up and I think that'll probably get us ready for Lisa to close us out. But it's a question about installment sale treatment. And is it possible to opt out? Great question, kind of interesting. Not well-known, but the general rule is when you sell something and you are paid over a period of years the general tax treatment is you pay as you receive the proceeds, or the sale, the purchase. So if I sell my business, I'm paid out of a 10 equal installments or even unequal installments. I only pay tax as those installments come in. Makes sense. I believe the question here is, hey if I'm selling something, let's say my business and I agree to take 60%, 70% of the purchase price upfront and then paid off over the remaining percentages equally over the next two years, can I opt out of paying it as it comes in? And the answer is, yes you can opt out of installment sale treatment. It generally requires an affirmative election on the tax return for the year in which the first payment was made. So that means for the 2021 tax return you would file a form. I don't remember off the top of my head but would opt you out of installment sale tax treatment. This is a risky venture for sure because you kind of really look into that crystal ball of one am I sure I'm gonna get paid? I guess that won't be a big issue. And then also my pretty certain that the taxes are gonna be so much greater. It's better to, in essence prepay it before actually receive the money. But it's one of the few questions we're asked in the tax world that has a clearly mathematically in my opinion, driven to answer. So it's possible. It might even be preferable or useful. I'll let people know this too. It's also possible if you're currently getting installment sale treatment on something to, I believe to opt out of that you can change that up. And I don't remember off the top of my head exactly how you do it but there is an opt-out methodology to accelerate that. So if you think you're gonna end up in installment sale or on an installment sale and you believe it might be interesting to look at that as something else to add to the repertoire of tax strategy, to be dissected and discussed this year.

What'd you have couldn't you just go back and to whoever you had the contract with and say, okay, well, what's the pain to me of receiving that installment payment next year at a potential 40% rate. So are you willing to drop your price down a little bit to get that cash early? So present value calculation.

Yeah, and that's actually, when I think about it that's actually what I was thinking of when I've had this come up before is that you it's actually it's nothing that you're changing the actual treatment on your tax return. It's just, hey, I'd rather take something less than a hundred percent on a future payment by being paid upfront. One, because I'm more secure that I'm actually gonna get paid perhaps but two in this context, because tax rates are likely to go up. There is, again, that pain point of if tax rates go up 5% or 10%, maybe that doesn't make sense but if they go up in some of the proposals that are kicked around out there are pushing it to the equivalent to an order income tax rate, or roughly 40% going from 20 to 40 might make that equation a lot better for you to just go ahead and pay the tax and take some sort of discount. So it's a mathematical equation. It's an interesting question. It's an interesting philosophy or path to head down. And one of which I would expect, we're gonna see a couple more people asking about on a go-forward basis.

Well, it's also a cashflow issue. So if you've got the extra cash flow you can just make the decision I'm gonna opt out whether you received the proceeds or not. And just go ahead and pay them.

Yep. For sure.

I think the form is 4787, by the way.

That sounds right.

Lisa, any more questions?

Not standing or in the queue.

So for those of you who did have a question we didn't get to or you just didn't feel like asking it our contact information has been out there, feel free obviously, but bring it back to Lisa to close us out and let everybody go about their day.

Great, well, I've heard Jeff say hundreds of times to clients that, "There are three kinds of people, the ones that make things happen, wait for things to happen. And the ones that ask what just happened?" And you definitely, this is one of those scenarios where you don't wanna be in the third category. So what we've really tried to accomplish today was to kind of give you the information and the advice that you needed to work with your tax and legal advisors to analyze the various impacts on your business and your personal planning. So you can develop a plan that you can implement quickly should the law pass in September or later in the year. Given the potential impact, I think you heard today we expect a busy end of the year planning, and it's gonna be challenging if you haven't done the analysis and you begin too late. So if you'd like to have a follow-up call to discuss your particular business situation your personal situation, please reach out to your key private bank relationship manager or your commercial relationship manager or you can certainly reach out to any of the three of us. And we'll be happy to take a call. We want to thank you for participating in today's call. We hope you'll join us on May 27th at 3:00 PM. That's the next topic in our Unlocking Opportunity Series for Business Owners it's going to be dealing with disruption, managing transition, options amid uncertainty. So thanks for joining us and have a great afternoon.

Thanks everyone.

Thank you.

In late March, Senate Budget Committee Chairman Bernie Sanders introduced a bill that would decrease the estate tax exemption from $11,700,000 to $3,500,000 and the lifetime gift tax allowance to $1,000,000. Under the proposed law, estate tax rates would also increase from a flat 40% to a progressive scale ranging from 45% to 65%.


This has pushed business owners to ask the important question: What’s my contingency plan?

Lisa Clifford, Family Wealth Strategist, leads an engaging discussion in this second installment of the Unlocking Opportunity workshop series. Listen in as Lisa is joined by Managing Director of Family Wealth Consulting, Jeffrey T. Getty, and Senior Director of Family Wealth Consulting Francis P. Brown to boil down the complexity of possible Congressional tax laws. Get up to speed on the simple, proactive, actionable moves you can make now to prepare for an uncertain future.

To understand more about how 2021 tax proposals may impact your business, contact our speakers through our Business Advisory Services team mailbox.

Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice.

KeyBank does not provide legal advice.

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