Our last post discussed end-of-year planning to lock-in estate tax savings, and get more to your family, before the tax law changes.
Here are some other strategies to consider now before taxes could go up in 2021:
- Accelerate income (e.g., bonuses, exercise stock options) in 2020.
- The Coronavirus Aid, Relief and Economic Security Act of 2020 allows a deduction of up to 100% of adjusted gross income (AGI) (up from 60%) for cash contributions to qualified charities.
- Politicians have also warned that capital gains tax could potentially double. It may be possible for someone to pay more than 50% tax on capital gains: 39.6% federal income tax rate + 3.8% net investment income tax (under the Affordable Care Act) + 0.9% additional Medicare tax (Affordable Care Act) + 8.82% New York State rate = 53.12% !
Consider a Charitable Remainder Trust. Contributing appreciated assets, such as stock, family businesses and real estate to a Charitable Remainder Trust is a good way to avoid capital gains tax. The Charitable Remainder Trust is tax-exempt. It may sell assets free of tax and invest the proceeds tax-free. You can enjoy distributions from the trust at very low tax-favored rates, and at the end of the trust term, the remainder will go to a qualified charity. You will receive a tax deduction equal to the present value of the remainder that will be left to charity. The benefits: tax free growth of trust assets, a low-tax income stream for you and your beneficiaries, philanthropy of your choice, a charitable deduction and significant capital gains tax minimization. Benefits can be further enhanced by creating a tax-exempt family foundation to serve as the qualified charity receiving the remainder from the charitable trust.
In addition to lowering estate taxes and getting more to your heirs and less to the IRS, proper tax and estate planning also provides the following benefits:
- Family governance and centralization of family assets
- Legacy and succession planning (including family business and personal assets)
- Income to beneficiaries
- Specific family concerns and special needs children
- Charitable considerations
- Locking in “basis” for appreciated assets in uncertain fiscal times. This is especially important because Biden also campaigned on eliminating the “step up” in basis on appreciated assets. This would mean that your heirs would either pay tax on unearned appreciation, or would inherit your basis, resulting in a large capital gains tax when your heirs sell.
- Gift tax planning
- Asset protection and wealth preservation
- Estate tax minimization on the state level.